More than ever, hospitals are vigilantly monitoring their cost of capital. Serendipitously, some experts predict a surge in online trading of municipal bonds in the next few years that promises to reduce costs for issuers.
Dozens of Web sites have sprung up for municipal bond trading, and large investment banks are creating online trading platforms that will streamline the process of marketing and selling bonds, particularly to institutional investors.
Among the early experimenters in online municipal bond trading is Shattuck Hammond Partners, a New York-based investment bank that specializes in healthcare. Shattuck Hammond is a division of New York-based PricewaterhouseCoopers Securities.
Since September 1999, Shattuck Hammond has managed at least five online municipal auctions valued at a total of about $151 million. Three of those were hospital deals: a $20.6 million offering for 540-bed Lehigh Valley Hospital in Allentown, Pa., in April; a $23.2 million offering for 158-bed Lewistown (Pa.) Hospital in November 2000; and a $43 million offering for 271-bed Danbury (Conn.) Hospital in September 1999.
Mark Harrison, a founding partner and manager of the firm's San Francisco office, will present a session titled "Advanced Issues in the Municipal Bond Market Using Internet Technology" from 2: 45 p.m. to 4: 45 p.m., Tuesday, June 19.
Harrison, who also has experience in hospital management, says he will tell healthcare executives what they need to know when they approach the mercurial bond market.
"The traditional process in which there is a whole chain of people involved in distributing the bonds has changed," Harrison says.
The Internet has furthered a process of increasing competition in the underwriting and investment banking field that began about 15 years ago, he says. That competition has dramatically lowered underwriting spreads, which are commissions charged by investment banks to assume the risk of buying new securities. Once as high as 5%, those spreads have decreased to 0.5% and are poised to disappear entirely if online auctions take hold, Harrison says.
Thanks to the Internet, direct auctions of bonds are set to replace traditional negotiated underwriting in which bankers solicit offers and raise yields if necessary to attract buyers. In the new model, marketing and auctioning is done via a Web site. Investment bankers continue in the role of financial advisers but do no underwriting.
Harrison compares competitive online auctions to the Napster software, which reduced the cost of distributing music by cutting the middleman.
The analogy isn't perfect. Still, like swapping songs electronically, competitive auctions of municipal bonds face resistance, Harrison says. Major investment banks stand to lose underwriting fees, and institutional investors that now get first dibs on securities because they have cozy relationships with underwriters will lose their advantages, he says.
Still, the potential interest savings for providers could win out. Harrison estimates online auctions save issuers 5 to 10 basis points off of interest rates for traditional negotiated bond issues. He believes the savings could increase by another 10 basis points as the use of online bidding increases.
In an era when hospitals are grappling to improve margins while meeting growing capital demands, even that modest savings could be welcome news.