Rarely do hospitals and healthcare systems put their bond business out to bid.
So when Sarasota (Fla.) Memorial Hospital sold $21.2 million of tax-exempt bonds competitively-and did it via the Internet-it made history. It was the first-ever sale of tax-exempt hospital bonds over the Internet.
A.G. Edwards & Sons won the "cyberauction" with an "all-or-none" bid of 4.7297%, which represents the true interest cost of the issue. All or none means the underwriter's bid covered the entire bond transaction, rather than selected maturities. The serial bonds extended through 2015 in amounts ranging from $890,000 to $1.7 million.
By opening the sale to underwriters by live auction, Sarasota Memorial believes it reached regional securities dealers who otherwise might not have bid on the bonds. That element of competition saved the 543-bed hospital more money than it had expected, Dale Beachey, Sarasota Memorial's longtime chief financial officer, said in a press release on the deal. At deadline, Beachey was unavailable for comment.
Pittsburgh-based MuniAuction, the nation's first Internet-based bond auctioneer, conducted the sale July 15 over MuniAuction.com. Five firms bid on an all-or-none basis, and 12 firms submitted maturity-by-maturity bids. Privately owned MuniAuction has conducted a dozen-or-so sales since getting into the business last October.
Depending on the deal size and services required, MuniAuction gets a negotiated fee from the issuer ranging from $5,000 to $25,000, says Myles Harrington, the company's president. Fees, he adds, are likely to come down as more issuers use the service.
Hospitals and health systems rarely open up bond pricing and terms to competitive bidding, says Michael Grossman, a professor of economics at City University in New York and an economist at the not-for-profit National Bureau of Economic Research, based in Cambridge, Mass. Grossman is coauthor of a study comparing negotiated and competitive sales.
Between 1980 and 1993, 91% of tax-exempt hospital issues were negotiated, 3% were private placements, and 6% were competitive issues, the study shows. Negotiated deals, on average, added 58 basis points, or 0.58%, to hospitals' interest cost.
It's difficult to compare the rate on Sarasota Memorial's bonds with what it might have gotten by negotiating with an underwriter, says Bob Davis, a senior vice president in the Sarasota office of Ponder & Co., the hospital's financial adviser. But he's convinced it was the right thing to do.
Yields on healthcare bonds typically run 5 to 15 basis points higher than those issued by municipalities, Davis explains. But Sarasota Memorial's AAA-insured bonds did slightly better than a $105 million insured sewer bond deal, which was offered competitively, and a $40.9 million insured aviation bond deal, which was negotiated.
"On any given day on a competitive basis, you should be able to obtain the lowest (true interest cost) available in the market," he argues.
Because Sarasota Memorial is a frequent issuer and "known commodity" in the market, the deal was ideally suited for competitive sale, Davis says. Being insured by MBIA Insurance Corp. and having strong underlying ratings from Fitch IBCA and Moody's Investors Service also helped.
Hospitals with complicated deal structures and lower ratings, for instance, might do better negotiating directly with an underwriter, he says (See box).
So why aren't more hospitals asking underwriters to bid on their bonds?
"The argument typically was that an underwriter provides other services that may not be fully captured by the interest cost," Grossman explains. In a negotiated deal, an underwriter might provide more services, such as helping to structure the transaction, he says.
But Grossman doesn't think that accounts for the entire difference in cost. "It's really more a lack of competition," he says.
Others have a different view.
"Frankly, in healthcare there's value to having an investment banking relationship," says Mark Hall, a principal of Northfield, Ill.-based Kaufman, Hall & Associates. Investment bankers provide an ongoing source of financing ideas and may work harder to get a deal done, he says. Negotiated deals also provide some flexibility, whereas a competitive sale locks a hospital into a specific terms on a specific date.
Furthermore, a competitive sale might disrupt existing investment banking relationships, which some hospitals may be hesitant to do, says Bill Mates, a managing director at Philadelphia-based Fairmount Capital Advisors.
Sarasota Memorial's usual bankers, Goldman, Sachs & Co. and Lehman Brothers, were unavailable for comment at deadline. "I'm sure they would have preferred that we do it with them on a negotiated basis," Davis acknowledges.
Nevertheless, the conventional wisdom that healthcare issues are too complicated for competitive bidding is out of step with reality, he says. "I think we have buyers who have more education than we're giving them credit (for). There's no reason why we can't be doing more competitive-bid transactions."
Whatever the case, Internet bidding isn't likely to become a trend in healthcare, experts agree.
"Over time we probably will begin to see a few more of those deals in healthcare, but I think it's going to be a fairly slow process," Mates says.