Investing in the High Yield Municipal Market: How to Profit from the Current Municipal Credit Crisis and Earn Attractive Tax-Exempt Interest Income

Hospital Revenue Bonds

Tax-exempt hospital revenue bonds have been and continue to be the go-to sector for many institutional investors looking for additional tax-free yield. Since Congress authorized the Medicare program to reimburse nonprofit hospitals for their capital improvement costs back in 1966, tax-free hospital bond financings have been a steady and significant component of high yield municipal supply. Historically, the high yield muni funds would consider for purchase any health care issue rated from A all the way down to below investment grade and nonrated.

The market for tax-exempt not-for-profit hospitals spans a broad spectrum, from large multistate and multihospital systems to small rural and critical access hospitals. The credit quality range is equally broad, as is the sophistication of hospital management. Within the sector, teaching hospitals associated with large university systems tend to have the most stable credit profile and are viewed most positively by the market. At the other end of the spectrum, so-called hospital districts tend to be penalized as small, stand-alone community facilities owned by local governments with marginal financials and unsophisticated management, in spite of having access to ad valorem taxing capacity to fund operating expenses. Within those extremes, critical access hospitals are generally well received by investors since they are certified to receive cost-plus reimbursement from Medicare in order to serve hard-to-reach rural ...