Think of hospital bond deals like playing Russian roulette: If you win, traders say, you feel just great once your hands stop shaking.

A roiled health-care system has turned the hospital industry upside down. Beset by rising overhead costs, increasing competition, and snarled third-party Medicare, Medicaid, and private payment systems, even efficient hospitals find that profitability is a daunting goal.

Financial health varies widely from hospital to hospital, so determining the value of a bond is tricky. Traders are hard-pressed to find actively traded names in the secondary market and therefore cannot rely on average yields or an index.

Uninsured hospital bonds trade at the bottom of the barrel, where ratings and yields range widely and fluctuate often, depending on the project. Insured bonds do not fare much better, as the hospital sector's dubious reputation has tarnished credit enhancement.

Traders are willing to talk about the risks and rewards of hospital bonds, but only anonymously.

"To be honest, it's such a funky sector I don't like trading them unless I know it's a solid situation," said the head of a major Wall Street-based trading desk. "You have to have thorough research behind you or you're just playing Russian roulette."

"I don't touch that stuff," another trader echoed. "You never know what you're getting into with those bonds."

Scarce Data

To calculate a certain hospital bond's value, a trader must know the specific project well and have up-to-date information, which, they are quick to note, is hard to come by. The net result can be bids off the mark by 30 basis points.

"One of the glaring negatives in terms of trading is that information is not readily available to you, and it's usually old by the time you get it," said the head of a New York-based trading desk. "There have been traditional measures of success for hospitals, such as number of beds or physicians, but these measurements are becoming more inappropriate as medical techniques change."

Conversely, it is one of the only sectors in the market where a trader can find risk and work for two points on a trade, with a 50-basis-point spread not uncommon.

"From a trader's standpoint, you can give your client good yield and make money on them," a New Jersey-based trader said. "There aren't many people who can play them, so the people who know their stuff can pick bonds up with good spready. You just have to realize it's risk-reward."

Most outstanding hospital bonds are rated Baal to A, traders say. They note that uninsured hospital bonds with a Baal to an A rating carry yields in the 7 3/4%s to 7 5/8% range, while insured bonds with the same ratings trade in the 7 1/4% to 7 1/8% range. However, yields for other hospitals can vary widely from those general norms.

Traders do have some rules of thumb.

Independent hospitals are always a riskier bet, according to a recent report on hospital revenue bonds by Moody's Investors Service. Multhihospital systems, groups of separately incorporated hospitals controlled by a parent corporation, are considered a safer credit.

Beyond solid research, the last trade on a bond may offer a better view of true value.

"People depend on evaluation services mostly for tracking the last transaction, and often that's the first thing you do before you try to trade the bond," a trader said. "This is when the real expertise in the market comes in -- researchers have to come to me with a grip on the credit, and I've got to find out the nature of the beast in the marketplace."

Traders often will turn to companies that run unit investment trusts to find out if a certain hospital bond has been approved for use in them.

"The first thing I do is check to see if they have UIT approval," said one trader. "If they don't, it's a risky call."

Traders said they might see one or two hospital bond trades per day, but that the players are few.

'The Spread Is There'

"The hospital world covers a much larger spectrum of credits and suffers from much greater illiquidity," a trader said. "Away from the primary, you don't see guys who want to stock and own hospital credits, and it seems like things are stacked against doing business, but the spread is there for people who know what they're worth."

Hospital bonds do offer some higher yields than other revenue bond credits, traders note, and because market players are shy of the bonds, often the few investors who touch them can press greater concessions from an issuer.

"For institutional investors you get yields that work for your portfolio and you can get tailor-made structuring out of the new issues," one trader said. "You can get the deal done the way you want, although it tends to limit the number of guys who know the bonds."

The outlook for hospital bonds is clouded, traders say, as the federal government begins to grapple with health-care questions and the economy starts to mend.

When and how the industry improves is q eustion that most agree will be answered slowly. But one trader noted that the risk-reward factor is great enough to generate some lucrative business.

"I guess if you're a good retail salesman, you can sell anything," he said.

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