Bank of America strategists point to nursing homes, among other riskier sectors, being behind more defaults in the $4 trillion municipal bond market this year.
Expectations come after a 122% surge in first-time payment defaults for January 2023 compared to a year ago, according to a report published by Bloomberg on Tuesday.
That translates to a year-over-year increase in first-time payment defaults to $611 million. In 2023, muni-bond defaults are expected to be between $1.7 billion and $2.1 billion.
Almost all defaults were linked to unrated securities in the nursing home, hospital and not-for-profit industries, according to the article.
Nursing homes and senior living made up the smallest percentage between the three sectors at 13%, however, with not-for-profits and hospitals representing 48% and 39% of defaults so far in 2023.
This doesn’t bode well for not-for-profit nursing home operators, and the data reflects that. Just this fall, the 2022 LeadingAge Ziegler 200 report found the 10 largest nonprofit operators were operating nearly 2,000 fewer nursing care beds at the end of 2021, compared to 2020.
More recently, nonprofit giant Evangelical Lutheran Good Samaritan Society consolidated its operations from 22 states to seven in January.
Bloomberg noted that hospital covenant problems are quickly becoming a hallmark of the late pandemic period, an interesting parallel to what Skilled Nursing News has been hearing in terms of rent deferrals among operators.
During the third quarter earnings call for LTC Properties (NYSE: LTC), the company shared that labor shortages prompted continued requests for incremental rent deferrals and abatements among its SNF operator tenants.
Pam Kessler, LTC CFO, believes occupancy recovery and reduced deferrals will happen this year. Other real estate investment trusts (REITs) including National Health Investors (NYSE: NHI) didn’t see nursing home tenants among deferrals, with seniors housing needing several months of deferrals instead.
The nursing home sector had until recently benefited from stimulus money and “extended stretch” of low interest rates, Bloomberg reported. With those buffers long gone, higher yielding debt outlook isn’t looking as bright.
Still, credit pain will be focused on smaller issues, according to the article.
Moreover, despite the expected rise in defaults, it appears that the outlook hasn’t dissuaded investors so far this year: “High-yield municipal bonds have returned 4.8% year-to-date, roughly two percentage points more than the broader market,” Bloomberg reported.
Companies featured in this article:
Bank of America, Bloomberg, Evangelical Lutheran Good Samaritan Society, LTC Properties, NHI, Ziegler
