Kaiser Raises Record $4.4 Billion in White-Hot Hospital Bond Market

Kaiser Permanente raised $4.4 billion through a series of three bond offerings this month.

That’s a record for the Oakland, Calif.-based health plan and hospital giant, which plans to use the proceeds to fuel expansion, said Chief Financial Officer Kathy Lancaster.

The aggregate interest rate on the A+-rated bonds was a stellar 3.8%.

Kaiser Permanente investors ordered four to five times as many of the A+-rated bonds as were available, Kaiser Treasurer Tom Meier said. Overall, the bond market is white-hot for hospital debt offerings.

Just this month, Community Health Systems grew a $700 million debt offering to $900 million. Competition for MetroHealth’s $945.7 million offering dropped the rate to under 5%.

MetroHealth, located just west of Cleveland, raised the money to finance the transformation of its main campus, including a new replacement hospital. Struggling CHS is refinancing debt that was expiring.

Corporate bond activity is expected to remain robust, even if the Federal Reserve raises interest rates a couple of quarter-point notches this year, according to an April debt report by Fitch Ratings.

Even with a quarter-point increase in March, Fed borrowing rates are still near a historic low at 1%. The government will only continue to raise interest rates if the economy is strong, said Fitch Managing Director Megan Neuburger.

What that means for hospitals is that higher interest rates would be offset by more patient volume since consumers might feel more financially comfortable getting elective and preventive care.

That’s the case even for troubled systems such as CHS with below-investment-grade debt ratings.

“The high-yield (bond) market is healthy,” Neuburger said.

Kaiser, the nation’s largest integrated health system with annual revenue of $71 billion, needs more hospital capacity, physician offices and technology enhancements after adding about 2.5 million new health plan members over the past three years, Lancaster said.

The recent acquisition of Group Health in Seattle and other organic growth has brought Kaiser’s enrollment to 11.7 million members.

Most of those enrollees will get their care at Kaiser’s 39 hospitals and hundreds of medical offices staffed by Permanente physicians contracted to Kaiser.

For Kaiser to meet its mission of convenient, affordable care, the system needs to keep investing in locations and technology that allows patients to select whether they come to a physician office or connect with its physicians through telemedicine or secure internet links, CEO Bernard Tyson told a Nashville Health Care Council luncheon audience last month.

Part of the reason this month’s offering was so big is that Kaiser had not gone to the debt markets since 2012, Lancaster said. Typically, it would do an offering every other year. But the need for capital and low interest rates urged Kaiser to put together the offering, Lancaster said.

Kaiser likes to operate with a debt-to-capitalization ratio of 20% to 30%, she said. The recent offering puts the system at 28%.

Interestingly, $1 billion of the $4.4 billion in bonds were designated as “green bonds” or those that appeal to funds and investors that look for environmentally or socially friendly organizations to invest in, Lancaster said.

Kaiser received that designation due to its new environmentally friendly hospital in San Diego that opened two weeks ago, she said.

MetroHealth reports that it had 122 banks, funds, firms and individuals put in orders for its hospital bonds.

“Not only is this an important validation of the success we’ve earned with our strategy, recent growth and operating performance improvements, it’s proof of the industry’s belief in MetroHealth and the path we’re taking,” said Dr. Akram Boutros, MetroHealth CEO.

The health system is using the proceeds to construct a new 12-story, 270-bed replacement hospital on its main campus as well as a new central utility plant and parking garage among other projects.

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