Investors in health-care bonds are positioning themselves for health-care reform and a new era that will require hospitals to provide a broader range of services more efficiently, industry officials said last week.

Acute-care hospitals will no longer dominate new-money medical issuance as the Clinton reforms force the hospitals to merge into networks or get squeezed out by competition, said Rae G. Boylan, a managing director at Bear Steams & Co.

Boylan spoke at a health-care conference in New York City sponsored by AMBAC Indemnity Corp.

To cope with change, he said, Bear Stearns will work with health-care institutions that have a dominant market share or facilities that provide services filling a particular niche in a certain market.

Boylan said the $150 million debt issuance cap for nonhospital 501(c)(3) bonds could become an issue for multi-unit health-care systems. The cap may limit a system's ability to issue tax-exempt bonds to fill voids in service, such as in long-term care or rehabilitative care.

In an era of health-care reforms, credits that do not have the strength to sell tax-exempt debt may turn to asset-based lending or to financings by the Federal Housing Administration, Boylan said. Up to now, most FHA deals have been for New York issuers.

In certain instances, Boylan said, Bear Steams may underwrite a weaker institution in the triple-B rating category.

"There may be situations that don't qualify for investment-grade ratings that we may be able to develop a sense of confidence and feel sanguine about," Boylan said.

Robert Fuller, a managing director at Standard & Poor's Corp., predicted that credit quality between the stronger and weaker institutions will continue to widen. He said national health-care reforms will not have immediate or drastic effects on ratings for health-care credits.

In-depth credit research will be what ferrets out investment opportunities in the new era, said Howard Manning, senior vice president of Putnam Management Co. The firm manages a $3.5 billion health-care bond portfolio.

From an investor standpoint, states that are forging ahead with their own health-care reforms before the federal government's reforms are good places to look for opportunities, Manning said. Health-care systems that provide a broad range of services in local markets in those states may be strong candidates, Manning said.

He said losers will include highly leveraged hospitals and institutions that have not become part of a network.

"Those are situations I believe will typically lead to a restructuring or workout, and are thus to be avoided," Manning said.

Health-care issuance as a whole will not be as robust as it has been, said Manning, but bond prices should rise if demand remains steady.

"This sector has had a huge run. Going forward though, when you have a market that has come as far as this one has some sort of correction is inevitable," Manning said.

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