Healthcare issuance remains light, running at over 30% below 2021 YTD levels. No channel of external healthcare capital formation has been active, but there have been interesting execution differences across private and public markets. As noted below, the rate path may start to moderate but the expectation is for continued high short-term rates—and likely relatively flat yield curves—through 2023. Not an inviting capital formation context, so surveying options is especially important, as is having a point of view on retaining or selling capital structure risk.
|
1 Year |
5 Year |
10 Year |
30 Year |
|
|
Dec 2—UST |
4.63% |
3.65% |
3.49% |
3.54% |
|
v. Nov 18 |
4.69% |
4.01% |
3.83% |
3.93% |
|
Dec 2 – MMD* |
2.39% |
2.53% |
2.61% |
3.48% |
|
v. Nov 18 |
2.74% |
2.81% |
2.91% |
3.59% |
|
Dec 2—MMD/UST |
51.62% |
69.24% |
74.87% |
98.20% |
|
v. Nov 18 |
58.40% |
70.10% |
76.00% |
91.44% |
|
*Note: MMD assumes 5.00% coupon |
||||
SIFMA reset this week at 1.85%, which is approximately 44.7% of 1-Month LIBOR and represents a -19 basis point adjustment versus the November 16, 2022, reset.
The Next Stabilization
It’s hard to know where we are right now. On Wednesday, Fed Chair Jerome Powell relayed that the Fed expects to raise rates again in December but that the pace of increase may start to moderate. So, the working premise is rates moving higher from current levels—but not as high as once feared—and remaining high through 2023. The other noteworthy thread in Powell’s remarks were his comments on labor. The Fed’s premise is that cooling an over-heated labor market is the gateway to driving inflation back toward the 2.00% target goal. Powell noted that most of the labor shortfall is attributable to unexpectedly rapid declines in workforce participation—likely attributable to COVID-induced early retirements and legal immigration declines. Importantly, as Powell pointed out, the Fed doesn’t have any influence over labor participation, which means the only thing they can do is attack the demand side of the labor participation equation—shrink demand versus expand supply. This seems to bump up against the 10+ million open job postings and Powell’s comment that the broader labor market “shows only tentative signs of rebalancing, and wage growth remains well above levels that would be consistent with 2% inflation.” So, forward inflation pressures are grounded in labor dislocation; the Fed is in the fight but can only indirectly attack the central pressure point by dampening growth; and the side of the equation—the federal government—that can access growth supportive levers isn’t in the fight and shows no signs of joining.
Financial markets have been leaning into the magic elixir of “moderating rate increases” —which basically says that the manifestation of the inflation crisis in their world seems to be moderating, and they can start to come out of their holes and think about re-risking and generally having fun. Over the past three weeks 10-year Treasuries have moved almost 50 basis points lower versus 2022 highs; equities have moved higher; and the Chicago Fed’s National Financial Conditions Index moved firmly back in negative territory, suggesting that overall risk, credit, and leverage conditions are looser than average.
The markets may be right that the worst of inflation is over, and we are heading toward stabilization; but as every healthcare executive knows, stabilization for our industry starts with profound and systemic business model dislocation and carries the expectation of a long slog back to a better place. I always thought The Carpenters represented what American pop music might have looked like if Jimi Hendrix and the 1960s never happened, but we’ll riff on them anyway and suggest that “we’ve only just begun” the journey toward healthcare stabilization. And, while Powell’s comments make the investor side of me happy, they set off alarm bells for the healthcare consultant side: the reality Powell described is that the only labor strategy being actively advanced at a national level is by an entity that can only use a very blunt instrument to try to reduce total labor demand, which is an approach that is rooted in contraction and is probably neither helpful nor hopeful for the specific labor dynamic in the healthcare sub-economy.
This is why Ken Kaufman’s most recent blog—When Financial Performance Matters—is so important. Ken points out that “this is a transformative period in American healthcare, when hospital organizations are faced with the need to fundamentally reinvent themselves both financially and clinically.” Every not-for-profit healthcare organization is a complex portfolio of resources that needs to address the potentially conflicting needs of funding mission-based operations and generating maintenance and growth capital (either from internal or external sources). The resource portfolio is warehoused across operations and balance sheet; and each resource sits somewhere along the resiliency/mission versus return continuum. Ken uses the concept of “sunk cost fallacy” to make the critical point that attacking inefficiency requires clarity about the role of resources and the institutional willingness to transform them into a more accretive form. The work that needs to be done by management and governance is to catalogue and understand every operating and balance sheet resource pool; clinically assess whether each is or is expected to be accretive or dilutive from both a mission and a return perspective; identify a repositioning road map; and execute relentlessly. All of this requires a disciplined framework and an openness to new possibilities, including the utilization of strategies that were rejected in more stable times.
Read Ken’s blog; adopt his thinking and work on holistic and integrated resource positioning across operations and balance sheet—both as a goal and as a sustained business management framework.
