One sector is an outlier when it comes to the traditionally tiny default rates in the $4 trillion municipal bond market.
Roughly 7 percent of the $43 billion in outstanding senior-living bonds, or about $3.2 billion, is in default on a payment, according to data compiled by Bloomberg. That compares to a rate of less than 1 percent for all state and local government debt.
Health care has been slammed by a shortage of caregivers and higher wage and supply costs, even as the pandemic pushed occupancy rates down. Hundreds of nursing homes have closed since the beginning of the pandemic as they cope with those pressures, along with government reimbursements that fall short of covering costs—and the fallout is expected to continue.
For elderly people with more options, the pandemic accelerated a growing preference to avoid senior living, said Eric Kazatsky, senior US municipals strategist at Bloomberg Intelligence.
“Since Covid hit, many elderly are opting to age at home,” he said in an interview.
Kazatsky points out that a significant number of Americans in the 55 to 65 age group now have long-term care insurance, giving them “a sense of agency over how their care is given.” And more seniors are moving in with their children in a return to multi-generational households, he added.
Overall defaults—including violations that don’t involve missed payments like reserve draws or covenant breaches—have improved in the sector since earlier in the pandemic, according to Kazatsky, dropping to $228.2 million through May, compared with $410.8 million in the same time period last year.
But a decline in new defaults “may not mean the sector is stabilizing,” Municipal Market Analytics analysts Matt Fabian and Lisa Washburn wrote in a May 8 report, citing continued high inflation, interest rates and labor costs.
“With almost $2 billion in retirement debt set to mature this year and a total of $3.5 billion by the end of 2024, MMA expects that — absent an unforeseen surge of issuance — sector default and impairment rates will hit new highs,” they wrote. They analysts calculate a 10.5% rate of payment defaults in the sector.
Senior living encompasses a variety of options, from communities where residents are healthy and live independently, to those that provide full-time care. Many developments include a range of care so residents may start out in an independent unit and eventually move to sections offering more support.
While occupancy rates for independent and assisted living properties have climbed from the depths of the pandemic, they are still 4 percentage points lower than the beginning of 2020 at 83.2% in the first quarter of this year, according to the National Investment Center for Seniors Housing & Care.
For new projects, there are numerous questions about what the business model should look like, Kazatsky said, in terms of who will live there, what services they will want and whether there will there be enough staff to care for them.
“It’s a hard model because whenever you sell new construction, you’re using projections, and as we just found out three years ago, those projections can go seriously wrong very fast,” he said. “There’s a reticence on behalf of underwriters and lenders, especially now when credit is contracting, to jump into projects that at best could be described as quasi-speculative.”
(With assistance from Martin Z. Braun and Trevor Rowe / Bloomberg)
