Bonds Bounce Back With Health-Care Ruling
Junk bonds of healthcare providers are beating the high-yield market after underperforming in the first five months of the year, as a US Supreme Court ruling boosts investors’ optimism for the industry.
Speculative-grade debt of borrowers from HCA Holdings Inc., the biggest US hospital chain, to Canonsburg, Pennsylvania-based Mylan Inc. have returned 3.2 percent since the end of May, compared with 2.4 percent for the Bank of America Merrill Lynch US High Yield Master II Index. In January through May, the 4.6 percent gain for health companies trailed the 4.9 percent for the broader index.
The court decision last week, which left President Barack Obama’s transformation of the US health system substantially intact, benefits bond buyers as it reduces the risk that health providers will be stuck with unpaid bills. The justices ruled that Congress has the power to make Americans get insurance or pay a penalty.
“The ruling was better than what most people expected and when it came about, there was follow-through buying,” Brian Tanquilut, an analyst at Jeffries & Co. said in a telephone interview. “The run-up ahead of that was in anticipation of the ruling. There was thinking that if the law was blown out, there would be renewed uncertainty.”
Bad-debt expenses exceed 10 percent of revenue at major acute-care hospital operators, Moody’s Investors Service said in a June 5 report. LifePoint Hospitals Inc. recorded the highest expense from unpaid bills as a percentage of revenue at 14.6 percent in 2011. The Brentwood, Tennessee-based chain has about $1.2 billion of bonds outstanding, Bloomberg data show.
“Healthcare has a lot of different sub sectors but the dominant one is hospitals,” said Michael Anderson, a US high-yield strategist at Citigroup Inc. in New York. “The hope with the bill is that you would have extra demand for healthcare services and fewer bad debt write-downs.”
Elsewhere in credit markets, the extra yield that investors demand to hold corporate bonds issued around the world instead of benchmark government debt narrowed two basis points to 294 on July 3, according to Bank of America Merrill Lynch’s Global Broad Market Corporate & High Yield Index. The spread widened to a six-month high of 323 basis points, or 3.23 percentage points, on June 5.
The US two-year interest-rate swap spread, a measure of bond market stress, widened 1.5 basis points yesterday to 25. The gauge narrows when investors favor assets such as corporate bonds and widens when they seek the perceived safety of government securities. It declined to 23 basis points on June 26, the narrowest in almost a year.
The cost of insuring against a default on European corporate debt rose from a two-month low, according to credit- default swap traders. The US had its Independence Day holiday yesterday.
The Markit iTraxx Europe Index of swaps tied to 125 investment-grade companies climbed three basis points to 159, the first increase in four days, according to data compiled by Bloomberg. The Markit iTraxx SovX Western Europe Index of contracts on 15 governments added four basis points to 270, rising from the lowest in three months. In the Asia-Pacific region, the Markit iTraxx Asia index of 40 investment-grade borrowers outside Japan advanced 2 to 164.5 as of 8:45 a.m. in Singapore, Royal Bank of Scotland Group Plc prices show.
Credit-default swaps typically fall as investor confidence improves and rise as it deteriorates. Contracts pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
The Standard & Poor’s/LSTA US.Leveraged Loan 100 Index rose to 93.45, the highest since May 16, from 93.38. The measure, which tracks the 100 largest dollar-denominated first- lien leveraged loans, has climbed from a five-month low of 91.8 on June 5. Leveraged loans and other speculative-grade debt are rated below Baa3 by Moody’s and BBB- by S&P.
The Supreme Court’s decision on the Patient Protection and Affordable Care Act, the biggest change to the US health system since Medicare and Medicaid were established in 1965, marked the climax to a legal fight that featured the longest courtroom arguments in 44 years and a record number of briefs.
Chief Justice John Roberts, a Republican appointee, joined four Democratic-selected justices to vote 5-4 in favor of the overhaul that would require every American to carry health insurance.
“The biggest winners are the providers with the highest levels of uncompensated care,” said Fitch Ratings analyst Megan Neuburger. “Investors are also starting to see some of the positive things going on in terms of operating conditions being improved.”
The number of people without health insurance swelled to 49.9 million in 2010, or 16 percent of the US population, from 36.6 million or 13 percent in 2000, according to Census Bureau data. The law may add coverage for 32 million people by decade’s end, according to Congressional Budget Office estimates.
The extra yield investors demand to own junk-rated healthcare debt instead of Treasuries shrank to 561 basis points from last month’s high of 673 basis points on June 5, according to the Bank of America Merrill Lynch US High Yield, Healthcare index. The gauge tracks 160 bonds with a market value of about $84.4 billion.
Bonds of Nashville, Tennessee-based HCA have gained 0.5 percent this month following a 2.9 percent return in June. The company, which KKR & Co., Bain Capital and Merrill Lynch & Co. helped to take private in a $33 billion leveraged buyout in 2006, has $18.2 billion of bonds outstanding. That accounts for more than 22 percent of the $80.7 billion of securities in Bank of America Merrill Lynch’s healthcare bond index.
Mylan, the maker of generic and specialty pharmaceuticals with $2.9 billion of bonds, has returned 1.1 percent in July after a 2.2 percent gain last month, Bank of America Merrill Lynch index data show.
“The ruling was a big overhang for healthcare,” Citigroup’s Anderson said. “You have to have conviction to trade. And if there is no conviction one way or the other, people were probably waiting for the ruling to transact.”
Healthcare bonds, which account for 8.4 percent of the high-yield index’s market weight, are trading more since the court decision after being illiquid this year, according to Trace data compiled by Citigroup. The debt represented 10.9 percent of block trades from June 28 to July 2, compared with 6.1 percent before the ruling.
The industry has benefited from “systemic changes in healthcare delivery,” said Fitch’s Neuburger. “The ruling has also helped in removing immediate uncertainty surrounding the sector.”