Huntsville Healthcare Authority deal came amid financial rebound

The Huntsville Healthcare Authority issued $190 million of hospital revenue bonds as it saw a financial rebound from tough post-pandemic conditions.

The North Alabama-based public hospital operator, whose flagship Huntsville Hospital is the state’s second largest, structured the deal with a 2053 maturity and a mandatory tender date of June 1, 2030.

Bond proceeds will refund Huntsville’s commercial paper program for the $67 million purchase of The Orthopaedic Center as part of a plan to expand the hospital’s service offering, reimburse Huntsville for other capital projects and pay the costs of issuance.

Wells Fargo Securities was underwriter. Maynard Nexsen PC was bond counsel.

The authority, which hasn’t issued since 2020, is currently the largest and only provider of “high acuity services” in Northern Alabama, commanding 66% of the local market, Moody’s Investors Service said when it assigned an A1 with stable outlook to the bonds.

The local area was undergoing economic and population growth and now the hospital’s operating performance looks primed “to return to historical levels” after a weak fiscal 2023 marred by revenue cycle disruptions and increased labor expenses, the rating agency said.

“Huntsville will continue to contain its labor expenses with cost increases driven primarily by internal adjustments and incentives, and will focus on avoiding contract nurses,” Moody’s said. “Volumes, especially outpatient, will grow further as Huntsville incorporates the new orthopedic practice.”

Healthcare labor costs skyrocketed during the pandemic, driving costs up and borrowing down, leaving the market struggling to right itself since, said Kevin White, a Richmond, Virginia-based healthcare bond attorney at Butler Snow, one of Alabama’s busiest across 2023. He was not a counsel in the Huntsville deal.

High interest rates along with high labor costs were to blame; while labor cost issues were a sector-wide problem for some time, the problem “accelerated during and after COVID and continued to affect the financial ratios of some healthcare systems,” White said.

“That’s probably making them hesitant to go into the market until they improve those ratios, but I think will probably happen, from what I’ve heard, within the next year,” he said.

In the first six months of the year, municipal bond sales for healthcare were down 62% year-over-year, according to data from Refinitiv.

The Advisory Board, a healthcare policy research group, said in a report in July that the popularity of hospital bonds, strong over the last decade, declined in 2022 when interest rates rose significantly and investors began requiring extra interest on hospital and healthcare bonds as cost pressures mounted.

“Currently, some hospitals are refinancing their debt for new loan terms or negotiating with lenders for more time to pay what they owe,” the report said. “Some hospitals are also closing or scaling back unprofitable services, selling some of their assets, or reducing pay, temporary workers, and jobs to avoid defaulting on their debts.”

Adapting to new financial realities meant avoiding loss of the workforce, health strategists worked across the fiscal year to “minimize overly risky actions that would impact near-term sustainability,” the report said.

At 21% higher than 2020, labor costs continue to be the biggest share of hospital expenses today, according to data from Kaufman Hall’s August hospitals report.

While overall new issuance remained light across July “despite a sense of elevated investor demand and a lack of major risk events,” Kaufman said “limited supply mixed with the surge in redemptions” presented “favorable dynamics” for municipal issuers going forward.

In its rating, Moody’s also maintains ratings of A1 and P-1 with stable outlook on the Authority’s outstanding $624 million of pro forma debt that includes obligations associated with a commercial paper program. The outlook is stable.

In another healthcare deal, the Industrial Development Authority of Arlington County will sell $150 million of revenue bonds on behalf of the Virginia Hospital Center to finance the renovation and expansion of its main hospital facility.

Fitch Ratings affirmed Virginia Hospital Center’s AA-minus issuer default rating and the AA-minus revenue bond rating on around $270 million of outstanding debt ahead of the sale and said it expects currently weak operating performance to rebound to levels consistent with historical performance as the hospital increases capacity following completion of the current project.

“VHC has a stable market position in a favorable but competitive service area with a growing population and demonstrated demand for services,” Fitch said.

S&P Global Ratings affirmed its A-plus rating. “The rating reflects our view of VHC Health’s favorable enterprise profile, highlighted by a stable, growing market share in a competitive market,” said S&P credit analyst Chloe Pickett.