Some financially sound hospitals stand to gain better access to bond insurance since Financial Guaranty Insurance Co. re-entered the healthcare arena after nearly a decade-long absence.
But experts say new competition from the AAA insurer may only moderately lower prices and ease terms. And it offers no assistance to a growing population of hospitals with weak credit, which have largely been shut out of the bond insurance market in the last five years.
Insurance, which lowers interest costs for issuers and increases the marketability of their securities, became significantly pricier and harder to get following the massive 1998 Allegheny Health, Education and Research Foundation bankruptcy.
Forty-one percent of new healthcare bonds issued last year-some $7.5 billion worth-were insured, up from 38% in 2002, according to Thomson Financial Services. Those figures compare with 59% of new healthcare bonds that were insured in 1997.
Financial Guaranty will compete with three other AAA bond insurers: Ambac Financial Group, MBIA and Financial Security Assurance. In a separate class is AA rated Radian Asset Assurance, a division of Radian Group, which backs some BB and BBB bonds that don't qualify for coverage by other insurers.
Financial Guaranty, which hasn't offered insurance to hospitals since 1995, jumped back into healthcare this year after a change in ownership. Last December an investor group led by mortgage insurer PMI Group bought Financial Guaranty from General Electric Capital Corp., which had a more conservative investment philosophy, Financial Guaranty officials said.
This summer Financial Guaranty has insured two issues of new healthcare bonds, a $97.8 million deal by Cincinnati Children's Hospital Medical Center and a $130 million financing by Baylor Health Care System in Dallas. The company expects to guarantee a total of up to 10 healthcare transactions totaling up to $1 billion by year-end, said Ellen Gordon, who heads its healthcare group.
Gordon said the group is targeting the top of the hospital credit spectrum: facilities with strong A or AA credit. It will consider low A hospitals "if we believe they have a strong fundamental credit strength," she said.
"Our strategy is to do a thorough analysis and be selective on the types of credits we're going to insure," she added. Financial Guaranty won't back nursing home bonds, she said.
After the Allegheny Health debacle, which generated millions of dollars in losses for companies that guaranteed the not-for-profit system's debt, bond insurers reduced their healthcare exposure by tightening their terms and limiting the amount of debt they were willing to back for a single issuer. As a result, demand for bond insurance has far outstripped supply, even for strong credits.
"We see this as a good business opportunity," Gordon said.
Financial Guaranty's entry is somewhat good news for hospitals with strong credit, said Ed Malmstrom, managing director at Merrill Lynch & Co. "On the margin (Financial Guaranty's presence) may lower costs and improve terms," he said.
But there's no sign that the wide availability, affordable prices and lenient terms of the mid-1990s are on their way back. James Cain, a principal at Cain Bros., said, "It's a welcome relief to have a player like FGIC come back into the market. But I think the other players will continue to be selective and pricey."