Evaluating the underlying factors behind variable rate debt.
BACKGROUND
Recent trends show a greater usage of variable rate debt among health care bond issues. In 2004, 63.4% of the total health care bonds issued were variable rate compared with 30.6% in 1995 (Fitch Ratings, 2005).


OBJECTIVE
The purpose of this study is to gain a better understanding of the underlying factors, credit spread, issue characteristics, and issuer factors behind why hospitals and health system borrowers select variable rate debt compared with fixed rate debt.


METHODS
From 2000 to 2004, this study sampled 230 newly issued tax-exempt bonds issued by acute care hospitals and health care systems that included both variable and fixed rate debt issues. Using a logistic regression model, hospitals with variable rate debt issues were assigned a value of 1, whereas hospitals with fixed rate debt issues were assigned a value of 0.


RESULTS
This study found a positive association between bond insurance and variable rate debt and a negative association between callable feature and variable rate debt. Facilities located in certificate-of-need states that possessed higher case mix acuity, earned higher profit margins, generated higher debt service coverage, and held less debt were more likely to issue variable rate debt.


CONCLUSIONS
Overall, hospital managers and board members of hospitals possessing a strong financial performance have an interest in utilizing variable rate debt to lower their cost of capital. In addition, this outcome may also reflect that investment bankers are doing a better job in educating senior hospital management about the interest rate savings benefit of variable rate compared with fixed rate debt.
McCue
Michael J
MJ
Department of Health Administration, Virginia Commonwealth University, Richmond, VA, USA. mccue@vcu.edu
Kim
Tae Hyun Tanny
TH
D000067:Accounts Payable and Receivable; D000206:Actuarial Analysis; D002202:Capital Financing / Q000379:methods*; D003862:Depreciation / Q000639:trends; D005377:Financial Management, Hospital / Q000379:methods*; D006788:Hospitals, Voluntary / Q000191:economics; D007182:Income / Q000706:statistics & numerical data / Q000639:trends*; D007449:Investments / Q000191:economics* / Q000639:trends; D016015:Logistic Models; D017059:Models, Econometric; D012306:Risk; D019464:Tax Exemption / Q000191:economics*; D014481:United States