By Gayl Mileszko
Market Commentary
Critical Times
A young girl watches Mary Poppins and tries to jump off a barn roof with an umbrella, expecting to float on the air instead of dropping to the ground and breaking an arm. Weeks later, her teen-aged brother, tasked with washing dishes after a big Thanksgiving family dinner, nearly slices off a finger while cleaning the carving knife. That winter, their mother, seven months pregnant, no longer feels the baby moving and panics. In the spring, their father, back late from the mines, clutches his chest and collapses. All get rushed to the nearest hospital, the only place that can help, 45-minutes away, more if the roads are bad. Family, friends, or neighbors drop everything and drive those stricken and ailing to the emergency room, fill out paperwork as best they can, and explore best-worst outcomes in the cold waiting area, anxious to hear from a doctor or nurse. There are usually only four or five other patients being treated there but, given light staffing, which is about all that can be handled at any given time.
Hospitals
Critical access hospitals have been designated by the Centers for Medicare and Medicaid since 1997. They provide emergency medical care in remote, rural, and underserved areas where residents would otherwise have to travel a much longer distance to receive the care they need. It is not so easy to be designated by the federal government as a CAH, but they exist in no small number, comprising nearly 25% of all acute care hospitals nationwide. There are exceptions, but in general, the facility must first meet statutory and regulatory requirements that include having a state designation and established State Medicare Rural Hospital Flexibility Program, and a location that is more than 35 miles from any other hospital. These hospitals must provide 24-hour emergency care services seven days a week but may have no more than 25 inpatient beds and maintain an average length of stay of 96 hours or less per acute inpatient case. Despite all the requirements and restrictions, there are an astonishing number of these critical access hospitals currently operating in 45 states: 1,380.
Counties
Needless to say, these small medical facilities are vital to their surrounding communities, but at present there are approximately 691 U.S. counties with no hospital at all. Many of these counties are experiencing significant economic distress, with high unemployment, aging populations and infrastructure, a limited tax base, geographic isolation, and high instances of the so-called “diseases of despair.” Inflation – both in prices for household essentials and health care – hits particularly hard, in too many cases forcing tradeoffs between food and medicine. More than 1 in 5 older Americans live in rural areas, and their health issues are often solely managed by CAH physicians: heart attack, stroke, cancer, diabetes, respiratory disease, arthritis, head injuries, hip fractures, substance abuse. Treatment is costly but many of these hospitals serve populations with higher Medicaid coverage rates and low reimbursements or no coverage at all.
Federal and State Policy
More than a few critical access hospitals are in the crosshairs of redistricting efforts that can have a major impact on the composition of the next Congress and federal policy. The federal government has, historically and currently, recognized the plight of rural healthcare and provided incentives in the form of grants, direct loans, loan guarantees, capital improvement cost, and higher Medicare reimbursements – typically 101% of allowable costs. The One Big Beautiful Bill enacted last year included a $50 billion initiative for rural healthcare; $10 billion has already been awarded, on average $200 million per state per year. Each state, however, determines how it will reimburse CAHs for services provided to those insured by Medicaid. Unfortunately, for some rural providers, this aid is neither timely nor sufficient. Relentless financial pressures, reimbursements, and service limitations are forcing closures of numerous short-term care facilities. Not all rural hospitals have the critical access designation, and there is no official breakdown, but one tracking service counts 195 rural hospital closures since 2005. Many had negative operating margins for more than three years, occupancy rates below 25%, and less than 30 days cash on hand.
Kudos to the Top 20
Despite labor, inflation and demographic pressures, not all critical access hospitals are stressed and struggling. HJ Sims congratulates the top 20 critical access hospitals here recently cited by the National Rural Health Association. They are serving communities from Massachusetts to Colorado and are included on the Top 100 CAH list here published earlier this year by the Chartis Center for Rural Health Performance, based on a composite rating from eight indices of strength: inpatient market share, outpatient market share, quality, outcomes, patient perspective, cost, charge, and finance.
Oil and Fertilizer Prices
Our diplomatic, military and intelligence agencies are juggling a number of critical negotiations and strategic plans. The Iran conflict is front and center, but there are also talks underway with Venezuela, Cuba, India, the European Union, Greenland, various Middle Eastern nations, and China. Stock market indices, propelled by a handful of companies, have moved to record highs on AI profits and the latest news producing expectations for a quick resolution in Iran and a re-opening of the Strait of Hormuz to bring oil and fertilizer prices back to something like normal. Most investors are not paying attention to developments away from Iran and seemingly fail to take into account the high likelihood that the war drags on with lasting impacts on critical food and gas prices not only here but around the world.
Key Numbers
Several key economic data releases come out this week involving home prices and sales, consumer confidence, manufacturing, GDP, PCE, and durable goods. Unless the Core PCE comes in much higher than the expectation at 3.3%, none should prove to be much more of a market-mover than progress with Iran. Traders will nonetheless be watching the Chinese President’s trip to North Korea, reportedly at the request of President Trump, investor response to Pope Leo’s recommendations for guardrails on artificial intelligence, medical efforts to control the Ebola outbreak in Congo, and corporate earnings results from major companies including Dell, Costco, Marvell, and Salesforce. U.S. and global investors are also closely following the results of this week’s Treasury auctions, all ten, and Federal Reserve officials, all 12, out on the speaking circuit expressing their views during the first full week of the new chairman’s tenure.
New Federal Reserve Chief
Given his highly critical remarks over the years since his resignation in 2011, it is not surprising that the swearing-in of Kevin Warsh last Friday was not met with balloons, streamers and applause from the other Fed governors and thousands of staff. But he assumes the chair at a critical time. The economic landscape has shifted since he was nominated on March 4 of this year. We are now 90 days into this US-Israel/Iran conflict, the Strait has effectively been blocked for three months. The inflation rate is 3.8%, well above the target rate for more than 5 years. Gas prices are at $4.45 per gallon. Thirty-year fixed mortgage rates are at 6.62%. The K-shaped economy is reflected in the record highs in stock market indices contrasted with consumer sentiment at all-time lows. The 10-year Treasury yield is 4.48% and the 30-year is at 5.01%. The 10-year AAA muni benchmark yield stands at 3.05% and the 30-year at 4.41%. At this point, the futures traders are pricing in a significant chance of a rate hike in or by December. The next Federal Open Market Committee meeting, June 16-17, will be one of the most closely watched events of the year.
Congress
The House and Senate are in recess during this Memorial Day week, and they have a number of pending bills to address upon their return. These include the budget reconciliation for Homeland Security, the farm and food bill, and surface transportation reauthorization. Most of the lobbying dollars appear to be directed to the crypto bill, but the Government Finance Officers Association and Securities Industry and Financial Markets Association have outlined other legislative priorities: water, transportation, affordable housing, and the preservation of municipal bond tax-exemption. HJ Sims and Sims Mortgage Funding are keeping a close eye on the 21st Century Road to Housing Act and its treatment of provisions that regulate institutional investors and community banks, as well as the Local Infrastructure Financing Tools bill.
Municipal Bond Pricings
• There have been roughly 65 hospital financings priced this year. Guthrie County Hospital in Iowa may be the only example of a critical access hospital that has come to the public market. It is a county public hospital serving a primary service area population of 12,745 that brought $37 million of MIG3 rated bond anticipation notes in February; the sole maturity in 2029 was priced with a coupon of 4.50% to yield 4.04%. Quite a few CAHs are system-affiliated and issue debt as part of a larger obligated group. Small standalone hospitals often rely on U.S. Department of Agriculture rural development loans or direct loans from local banks to meet capital needs. But we assisted Reeves Medical Center in Bernice, Louisiana in bringing a $28 million non-rated bond financing to construct and replace the acute care CAH with 15 beds. For more information, please contact your HJ Sims representative.
• Altogether approximately $230 billion of new issues have been sold this year, including $16 billion last week in the run-up to Memorial Day. HJ Sims underwrote two charter school financings. We sold $12.79 million of BB rated revenue bonds for Champion Schools, which has 3 Arizona campuses with 1,348 students in grades K-8; bonds were issued through the Sierra Vista Industrial Development Authority and included a 2066 maturity that priced at 6.25% to yield 6.50%. We also priced $19.6 million of BB+ rated refunding bonds for Texas Leadership Public Schools, which operates 5 charter schools on 10 campuses with 4,096 students enrolled; we structured the transaction, sold through the Newark Higher Education Finance Corporation, with a 2056 maturity that priced with a coupon of 6.00% to yield 6.125%.
• Among other high yield transactions last week, the Blanchard Valley Port Authority in Ohio sold $26.3 million of non-rated bonds for the new Liberty Assisted Living community in Findlay structured with a 2046 maturity priced at par to yield 6.25%. The Public Finance Authority issued $27.3 million of BB rated bonds for Union Day School featuring a 2036 maturity priced at 5.50% to yield 5.60%. In the hospital sector, the Indiana Finance Authority privately placed $232.6 million of non-rated 7.125% bonds for Parkview Health System. And, in the student housing sector, Georgia’s Cobb County Development Authority brought three series of revenue and refunding bonds for KSU Housing Real Estate Foundations and Kennesaw State University; the 2057 term bonds were priced at 5.00% to yield 5.04%.
• This week’s $9 billion calendar includes our $16 million financing for Scholars Academy Sunnyslope, a K-8 charter school with 330 students in the north central Phoenix area. The non-rated bonds are being issued by the Arizona Industrial Development Authority and will allow the school to acquire land and expand the Sunnyslope campus.
Attractive Offerings
Summer is here, at least unofficially, and the year will soon be half over. This is a good time to reach out to your HJ Sims representative to discuss current market opportunities and review your 2026 goals. Fundamental as well as technical factors are providing a nice tailwind for municipal bonds despite the geopolitical and inflationary headwinds impacting all fixed income sectors. Municipal bond funds have taken in more than $41 billion since January, the second highest level of year-to-date inflows on record, and total assets under management now exceed $1.06 trillion. Investors will see $152 billion of principal and interest hit their accounts during the next three months, providing a wealth of reinvestment opportunities. High yield municipal bond index returns are outperforming those of U.S. Treasuries and corporates. And first-time defaults at $665 million are 59% below last year’s total. Infrastructure needs to continue to grow while many borrowers have demonstrated years of prudent fiscal restraint and are now coming to market with project financings that are carefully considered, stress-tested, and well-received. We are seeing good liquidity in the secondary market and buyers clamoring for high yield, tax-exempt paper in particular. Seeing the volatility in most other asset classes, the municipal sector appeals to many as stable and resilient. Call us to explore our offerings.