Welcome to the first edition of The Capital Issue in 2012. We’re happy to announce we are changing distribution from quarterly to bimonthly so that we can share more information more frequently. The capital markets continue to be in flux as they attempt to find a new normal in the aftermath of the Great Recession of 2008. Hence we thought you would find an update on interest rates and reviews of capital funding options for hospitals and seniors housing and care useful. On the affordable housing front, we welcome back the USDA 538 program in its new budget-neutral form. And the Nonprofit Minute provides some suggestions when deciding to hire an investment advisor.
The Federal Reserve in January announced that it expects the target fed funds rate to remain in the range of 0-0.25% until the end of 2014, in all likelihood. Prior to 2008, this would have resulted in a robust use of variable rate demand bonds backed by bank letters of credit to finance capital projects because the bonds are remarketed using short-term indices. However, we expect cost effective LOCs will continue to be difficult for any but the strongest credits to obtain due to the shrinking number of highly rated banks, the record number of LOC expirations over the next few years and the heightened capital requirements Basel III will require banks to maintain. Instead, a larger number of borrowers are using private placements to take advantage of the low short-term rates.
Although the Fed does not directly influence longer term rates, it conducted a second round of quantitative easing in 2010 that resulted in a general decrease in these rates. Further, the search for yield by long-term bond investors has begun to create increased demand for low investment-grade health-care issues, lowering the credit spread between AA-rated and BBB-rated health-care bonds. The aforementioned factors have in large part offset the fact that the historic economic advantage of tax-exempt yields compared to taxable yields at most points along the yield curve has disappeared.
- Tom Green, CEO
