Favorable market rates and fear of tightening federal regulations injected new life into the health-care bond market during the first three quarters of 1991, with volume jumping almost 40% from last year's levels.

Health-care issuers sold 555 deals during the first nine months of the year, totaling $13.7 billion, according to Securities Data Co./Bond Buyer. That compared with 448 issues during the same period last year, when volume hit $9.8 billion.

Industry analysts say several factors led to the huge volume gains, including historically low interest rates and fears among many issuers that the federal government was about to eliminate their ability to use tax-exempt bonds as reimbursement for certain prior expenses.

"The general level of interest rates is low, and that's prompted hospitals that were on the fence to go into the market," said Don A. Carlson Jr., president of Ziegler Securities, traditionally one of the biggest underwriters of municipal health-care issues. "There's a lot of pent-up demand for new projects."

Despite lower rates, refunding volume actually fell more than 21% during the first three quarters, to $2.6 billion from $3.2 billion in 1990's first nine months. Healthcare analysts said that might be because many candidates for refundings came to market last year, when rates also were considered extremely attractive.

"A lot of high coupon deals have already been refunded," said Glenn N. Wagner, vice president of credit research at Morgan Stanley & Co.

Mr. Wagner agreed much of the new issuance during the period was the result of extremely favorable interest rates, and he pointed to the changes in federal tax policy as another major factor.

The Internal Revenue Service originally proposed setting a Sept. 7 deadline for implementing a new policy on how hospitals can use new tax-exempt issues to recapture capital expenses for earlier deals. The


Senior Managers


Manager ($ mils.)

1 Merrill Lynch $1,478

2 Goldman Sachs 1,477

3 First Boston 977

4 Lehman Brothers 938

5 Ziegler Securities 856

6 Kidder Peabody 724

7 PaineWebber 573

8 John Nuveen 521

9 Smith Barney 464

10 Dillon Read 431

Nursing home and life-care issues are included.

Sources: Securities Data Co. (10/6/91)

policy would have restricted issuers from using tax-exempts under such circumstances, and the threat of losing the privilege prompted many issuers to hurry deals to beat the deadline.

"That was why everybody was rushing to get things done," said Troy A. Gerleman, a senior associate and fixed-income analyst at Kemper Securities Group.

As it turned out, the IRS decided to postpone the deadline and agreed that the final regulations would not take effect until 30 days after they are issued in final form. But the threat was enough to bring many issuers to the market with deals that might otherwise have waited until the fourth quarter.

The existing regulations allow hospitals fairly liberal use of tax-exempt bonds as reimbursement for projects financed several years earlier. The policy has given rise to the term "pyramid bonds" among some government officials -- a joking reference to the idea that the policy could be construed to allow issuance of bonds to reimburse expenses incurred in the construction of the Egyptian pyramids.

The stricter guidelines would only allow tax-exempts within one year from the time the capital assets were purchased or put into service, and the asset has to have an economic life of at least one year, Mr. Wagner explained.

Extensive documentation also would have to be provided to demonstrate that the issuer intended to use tax-exempt financing for the deal but was forced to postpone the bond sale.

Besides the deadline, some industry sources pointed to the market entry of Financial Security Assurance and Capital Guaranty Insurance Co. to explain the volume gains. The wider availability of insurance gave some issuers that might otherwise have stayed away the ability to enter the market.

Jan I. Weiss, a vice president at FSA, agreed that the firm has been able to help some issuers gain access to the market. He said that while FSA has the same tight credit standards as the rest of the municipal bond insurance industry, other companies have reached their desired capacity limits in certain metropolitan regions.

"That leaves the door open for FSA," Mr. Weiss said. So far in 1991, FSA has backed about $500 million of new health-care issues, he noted.

Looking toward the close of 1991, industry analysts generally expect fourth-quarter volume to be slightly lower than third-quarter volume.

"The slow summer we used to get never happened this year, but now it looks like it's finally starting," Mr. Wagner said.

Merrill Lynch & Co. ranked first among health-care underwriters during the first nine months of 1991, with 32 issues totaling $1.5 billion. Goldman, Sachs & Co.'s volume for the period was just $1 million shy of Merrill's mark, giving the firm a second-place ranking. First Boston Corp. was third, at $977 million.

In the co-manager position, Merrill Lynch was the clear winner, with almost $3 billion from 59 deals. Chapman & Cutler got top honors among bond counsel on health-care issues, with 38 deals and $1.1 billion in volume. The largest issuer was the New York State Medical Care Facilities Finance Agency, which sold nine issues totaling $719 million.

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