The volume of health-care bonds sold in the first half of 1992 grew dramatically from last year's level, but the second quarter was less impressive than the first.

The health-care total for January through June jumped 45% over the same period last year, to $10.75 billion from $7.4 billion, according to data compiled from Securities Data Co./Bond Buyer.

But the 26% growth rate for the second quarter, while impressive, was no match for the giant 84% leap that the market took in the first three months of the year.

Much of the gain in the first half came from refinancings, which doubled to $3.5 billion from over $1.74 billion in the first half of 1991.

"Low interest rates have been a big factor and caused some refundings that would not have been successful to become successful," said Edward C. Malmstrom, a managing director at Merrill Lynch & Co., the leading underwriter of health-care bonds during the first half.

Mr. Malmstrom said, for example, that it is now economically feasible to refinance old issues with coupons as low as 7 3/4%. "Up until now, except for a brief period in January, rates that low didn't make economic sense, but they do now," he said.

Low rates are also convincing new-money issuers to come to market and lock in favorable terms. The new-money category rose to $7.25 billion during the first half, from $5.66 billion last year.

Bond insurance covered 46% of the first half's health-care volume, or $4.94 billion. That was a 33% increase from 1991's $3.72 billion that was covered by insurance.

Mr. Malmstrom noted that spreads between insured and uninsured deals are narrowing with the latest drop in interest rates. "So we'll see more A or A1 institutions coming without insurance," he predicted.

Analysts say the first half's big increase was partly the result of a new Internal Revenue Service rule that took effect in March and spurred some issuers to market.

The rule restricts hospitals in their use of tax-exempt bonds to reimburse themselves for earlier capital expenditures. The regulation forbids bond sales for that reason unless they are sold within a year of when the capital assets are purchased or put into service.

The rule was originally set to become effective in September, which helped convince many issuers to come to market last year. But the IRS later agreed to extend the deadline, and it eventually took effect on March 2.

Analysts say issuers unable to come to market in 1991 hurried deals to market in the first quarter to beat the new deadline, adding to volume for the first three months.

But regardless of the other dynamics at work in the market during the first half, much of the volume gains are attributable to the most basic factor behind a bond sale: Issuers need cash.

The last big push in volume was more than six years ago, and that money is running out even as capital financing needs are on the rise.

A greater emphasis on outpatient care, for example, is one change in health care that has required new bond issues.

Acute-care facilities remain by far the largest issuers of health-care bonds, representing $8.64 billion of the total in the first half, up from $5.44 billion of last year's first half total.

Lehman Brothers was the first quarter's leading underwriter, but Merrill Lynch won the first half's number one slot. Merrill underwrote 30 issues totaling $1.23 billion in the first six months of 1992, edging past second-place Lehman, which handled 31 issues for a total of $1.17 billion.

Rounding out the top five in the health-care rankings were Goldman, Sachs, & Co., at $882 million; PaineWebber Inc., at $687 million; and First Boston Corp., at $676 million.

Officials at both Merrill Lynch and Lehman say hospitals use derivative products such as inverse floaters more frequently than other types of issuers, which also adds to volume gains in the sector. Hospitals can make financing decisions more quickly and are not subject to the same stringent oversight requirements as municipalities or public authorities, giving them more latitude in choosing to use derivatives.

In addition, analysts say, hospitals are not in the market as frequently as municipalities, so negative market reaction to interest rate fluctuations that hurt holders of derivatives are not as big a concern.

Hospitals still rely mostly on negotiated deals to bring their bonds to market, with $10.35 billion in negotiated volume sold in the first half. That compares to just $279 million in competitive deals, a 20% drop over 1991 first half levels.

Securities Data's figures include nursing home and life-care issues, but exclude taxable debt issued by private nonprofit organizations, short-term notes, municipal forwards, and remarketings.


Senior Managers


Manager ($mils.)

1 Merrill Lynch $1,225

2 Lehman Brothers 1,172

3 Goldman Sachs 882

4 PaineWebber 687

5 First Boston 676

6 Smith Barney 589

7 John Nuveen 548

8 Prudential Securities 478

9 Kidder Peabody 419

10 Ziegler Securities 375

Nursing home and life-care issues are included.

Taxable debt issued by private non profit

organizations, private placements,

short-term notes, municipal forwards, and

remarketings are excluded.

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