The historically low interest rate environment today is paving the way for a strong year in the tax-exempt senior living market for 2015, says Chicago-based speciality investment bank Ziegler in its recent 2015 market outlook report.
“Long-term interest rates for not-for-profit senior living providers are at generational lows for just about every borrower credit category,” writes Amy Castleberry, senior vice president of Ziegler.
As of Jan. 16, the 30-year interest rates for senior living organizations rated in the “A” and “BBB” categories, as well as non-rated senior living organizations, all beat prior lows seen in December 2012, data show.
“Current long-term rates for senior living providers now rival the rates at which only the strongest ‘AAA’ rated municipalities could borrow just 12-18 months ago,” she says.
Although senior living rates currently sit near absolute low levels, the yield differential between senior living interest rates and baseline municipal rates hover above 25-year averages, data show.
“It is our opinion that senior living borrowing rates may hold steady against a potentially modest rise in general municipal market rates in 2015, through spread compression, if the senior living sector credit outlook remains stable,” she says.
Bank credit markets show increasing improvement, with commitment periods of 10 years now being the norm.
“We believe bank appetite for senior living lending will be strong in 2015, provided that their cost of capital remains low,” she says. “However, once the Federal Reserve begins to raise short-term interest rates, appetite and competitiveness are likely to diminish, particularly for lenders new to the senior living sector.”
One possible cause for concern is the recent volatility in the municipal market.
“Since the start of the financial crisis, the market has seen several periods of 100-200 basis point market swings in a short amount of time,” she says. “Relatively thin liquidity in the high yield municipal market in particular and fewer market makers remain a risk to market stability in 2015.”
Read Ziegler’s latest report here.
Written by Cassandra Dowell