Podcast recorded February 20, 2015
An overview on investment grade versus high yield municipal bonds
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Hello this is Ruth Ducret. Welcome to the Breckinridge podcast. We are happy to have you here with us today. I am a municipal credit analyst with the credit research team here at Breckinridge with a focus on high-grade, nonprofit hospital systems. I am joined here today with my colleague Tim Daley, who also follows hospital credits. Our goal today is to discuss what we believe is an opportunity for hospitals to better inform market participants of their ESG efforts. We will start out first by going through how nonprofit hospitals are naturally aligned with a lot of the ESG criteria that bond investors care about, and then we will discuss why it is worth it for hospitals to ramp up their disclosure in terms of improving investor knowledge and market access. Tim, I thought maybe you could expand a little more broadly on this.
Sure, thanks Ruth. Given the transformative nature of the hospital sector and what we have seen over the past few years, we think that ESG factors play an important role in our analysis as fixed income investors, but there has been somewhat of a lag in the disclosure, especially relative to that of the corporate market. Nonprofit hospital systems are most suited to improve their transparency given that they do have a community benefit and they do receive charitable donations. So we think this closely aligns with ESG themes and what we, as fixed-income investors, are looking to see when evaluating issuers.
And again, what is ESG?
Environmental, social and governance.
Right, we have seen a lot of ESG initiatives across the universe of hospitals that we cover, so I just wanted to talk a bit about each one of those. Again, ESG stands for environmental, social and governance factors, and on the environmental side, we have seen that hospitals are seeking across the board to reduce ways to conserve energy and lower their carbon footprints and a lot of this is driven by cost control efforts, not only helping the environment but also helping to produce better and more stable margins. We are seeing a lot of compression in margins across the board, particularly on the revenue side, or from the revenue side, and so focusing on environmental efforts as a means for these hospitals to reduce their costs across the board. And then in terms of social, or the “S” initiative within ESG, the ACA, or the Affordable Care Act, as well as other market forces have pushed hospitals towards improving the underlying health of the communities that they serve, with an overarching goal of keeping them out of the hospital. And so hospitals now are focused on managing entire populations across the continuum of care. So from birth to death, the hospitals want to in some ways have a part of every single aspect of care of that individual, and the goal is reducing hospital visits, and this really fits nicely within ESG themes. And another good example of this would be Geisinger health, which you can reference in our blog. They have run a fresh food pharmacy to reduce the cost of patients who are diabetic.
Yeah, and I think we also mention Kaiser Permanente in California for their environmental initiatives with LEED certified buildings. But as far as the tangible results we have seen with environmental and social factors, governance is kind of an ever-changing theme here in the hospital industry given the M&A activity that has been going on for the last few years as these hospitals continue to seek larger populations and service areas. And with that growth of size and scope, the governance factor becomes more important because their reputational risk and managerial competence become more important credit concerns for us as investors. We do think that effective management teams and engaged and diverse boards of directors are often better equipped to handle the controversies or risks that are associated with corporate size. But at the same time there has been somewhat of a wide array of disclosure practices out there. We do think there can be strides made as these systems continue to evolve and grow with their size and scope moving forward.
Right, because we see these systems as being so corporate-like in many ways. They are multi-billion-dollar systems across multiple states and so we would expect that the level of sophistication in terms of their disclosure would normally, or should, match that of corporate entities, and we have seen across the corporate space that in terms of ESG disclosure that there are a number of organizations that exist like GRI and SASB. And again, GRI stands for Global Reporting Initiative and SASB stands for Sustainability Accounting Standards Board. These are types of frameworks and ESG reportings that already exist that are utilized in the corporate space but this is largely lacking in the muni market. In addition, annual corporate sustainability reports are becoming more commonplace in the corporate space but this is lacking in the nonprofit hospital space and we think that given how much more corporate-like they are that you would see a greater degree of disclosure, because a lot of them are already doing these types of ESG initiatives and they are just not reporting on them.
And by corporate-like, Ruth, are you trying to say that these hospitals, they are serving the community and patients that are essentially customers, whereas a typical municipality that we see in the public finance space is serving taxpayers, if you will.
Correct. And also the fact that we see across the space now a great deal of mergers and acquisitions as you would with a for-profit corporation as they continue to try to expand their market share and gain more customers as they are called, or patients.
Yes, I think it is safe to say, Ruth, that we think hospitals are ideally positioned to lead the way in this area as far as ESG disclosure and there have been some that have done so already. For example, there's the Healthy Hospitals Initiatives which was founded by the 12 largest systems in the country a few years ago and it is voluntary participation, but it provides goals for these hospitals to achieve in terms of producing less waste or serving healthier foods and reporting energy conservation metrics. But it's also, I think, is a general framework for disclosure of some ESG-related issues which is, I think, what we are trying to look at as we evolve in the hospital space and move ahead. And anecdotally, we have seen some hospitals produce corporate sustainability reports and I am sure there are others out there that are doing so. We might not necessarily have seen them highlighted in the investor presentations when they are coming to market for a new sale, or offering statements, or they are not even primarily highlighted or promoted on their websites. So as investors, we understand this is a time-consuming endeavor and can be burdensome but these ESG issues are a growing interest to the investment community. You know, some investors want to ensure that their capital is helping fund projects that will benefit society or other investors, like ourselves, who believe in the investment case in that considering these ESG criteria can help mitigate risks in a bond portfolio.
Right, because we believe that those entities that are more successful in promoting ESG are going to be more stable and better long-term investments, particularly for the higher-grade sector that we focus on. And so, just to wrap it up, again, we believe that that the greater transparency in ESG disclosure would help us and other investors to gain a better perspective of a hospital’s sustainability efforts and its overall credit quality and that we believe that over the long term, better ESG performance results in better profits or more stable profits at hospitals. It will enable them to lower costs going forward and more consistently.
We hope that you found this information informative. If you would like to read our blog on ESG disclosure, please reference our website. If you have any questions or comments, drop us a line at CR@breckinridge.com and thank you again for listening.
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Podcast recorded February 20, 2015
An overview on investment grade versus high yield municipal bonds
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