If your aim today is to squeeze an extra 1 percent from the tax-exempt bond market, you might consider health-care bonds. The bonds are a relatively new investment medium, which means they have to pay more than traditional revenue bonds in order to attract investors.
The bonds come in three varieties -- hospital bonds, life-care bonds and nursing-home bonds.
Hospital bonds are issued to finance a new hospital, and extension or remodeling. Interest and principal are paid out of hospital revenues. Alvan Markle, of the brokerage house Butcher and Singer in Philadelphia, says that their track record has been good. But because of their relative newness, they yield about 0.5 to 1 percent more than comparable bridge or tunnel-authority bonds.
Hospitals generally command a good deal of community support. That is good, intangible protection for bondholders in addition to all the tangible guarantees, Markle says. President CarterS proposals to control hospital prices would hurt the bonds' creditworthiness, but so far Congress shows little interest in passing such a law.
Life-care facility bonds finance non-profit retirement communities, which guarantee residents housing, meals, housekeeping help and medical care for as long as they live. Typically, there are 100 to 500 apartments, from studios to townhouses, located on large acreage. Clients are generally 65 and older and must meet certain health and financial standards.
In carriage-trade facilities, residents pay one-time entry fees of $25,000 to more than $75,000 depending on the apartment chosen, plus $450 to $1,000 a month. Many communities have long waiting lists, and those now in the planning stage expect to be fully occupied. As the population ages, demand for these kinds of homes can only grow.
Life-care bonds are so new that they are not yet rated by Moody's or Standard & Poor's, so a lot depends on the credit analysis undertaken by the underwriters. Yields now run in the area of 1.5 percent above comparably rated municipals. Markle especially commends the private, nonprofit carriage-trade facilities. Publicly supported homes are not very safte, he says, unless there's a solid gurantee by a public body with ample taxing power. s
b Nursing-home bonds finance extended-care facilities for the convalescent, the chronically ill and the aged who cannot take care of themselves. Demand for nursing-home space is growing. Many homes have waiting lists.
The typical home is state licensed and Medicare and Medicaid approved. Many are sponsored by cities, counties or churches. The newer homes tend to be privately owned. Their financial success generally depends on state and federal reimbursement, a substantial number of private patients (as opposed to those on government subsidary), and on good management.
Nursing home bonds are not rated. Markle says that some homes are very good and others very bad, so it is important to get good advice in selecting an investment. One of the chief dangers is that management will milk the place.
Among the financial safeguards to look for with any health-care bond:
The project has a state-issued certificate of need that the facility does not duplicate health care available elsewhere, and a feasibility study showing the project's economic viability, by a nationally known accounting or consulting firm.
The project's gross revenues are pledged to the bondholders. Also, the bonds are secured by a first mortgage on the facilities.
A rate covenant typically requires that the facility earn an excess of revenue over gross expenses equal to at least 120 percent of the average annual debt service. If revenues fall below this level, steps must be taken immediately to correct the problem.
A trustee holds a debt-service reserve equal to at least one year's worth of interest and principal payments to bondholders. With Butcher and Singer's life-care underwritings, there also has to be a large cash reserve sufficient to pay principal and interest on the bonds for a number of years.
Look for an underwriter who supports a continuing market in the bonds, to maintain liquidity if you want to sell. Because the market is small, however, you may not be able to get quite as good as resale price as you would with actively traded municipals.