Nines says hospitals are considering several strategies to deal with the issue. Some think the situation will correct itself with time, he says. Another strategy is to seek a bank letter of credit on top of the existing bond insurancea new layer of credit enhancement, he says. But going forward and much more obviously, the bond insurance crisis coupled with the widening credit spread is making it difficult for not-for-profit hospitals that dont have existing debt but are looking to finance new deals, both Nines and Donovan say. Nines predicts that with bond insurance looking less attractive, more not-for-profit hospitals will seek letters of credit from banks, noting that more than half the hospitals in Wisconsin have investment-grade ratings or better.
They could never get municipal bond insurance anyway, he says. It was primarily available only to the stronger credits. Thats why were trying to liberalize the rules on letters of credit, so that the local banks can be more involved.
In the near term weaker credits will probably pay more because of the wider spread, but the fact is they never could get insurance to close that gap, Samuels of the NAHEFFA adds.
The only groups opposing the legislation that would give the FHLBanks the ability to issue letters of credit are the bond insurers themselves, which are opposed to anything that looks like it might be competition. But this is aimed at institutions they are not even interested in during the best of timesnot the worst of times, Samuels says. There are lots of smaller institutions
that dont have deals big enough or ratings high enough to interest the bond insurers, he says.
The announcement late last year that Warren Buffetts Berkshire Hathaway was starting up a new bond insurance business generated some early excitement and seemed to validate the business model, Samuels says. That to me confirms in the long run that bond insurance may continue to have a place, he says. But it still is not clear if the new company, which received an expedited license from the state of New York, is even interested in insuring hospital bonds. The insurer is called Berkshire Hathaway Assurance Corp.
Were certainly hoping after the initial startup that they will look at (not-for-profit) institutions and not just focus on government bonds, Donovan of the Rhode Island authority says. I know there is interest in making sure they take a look at transactions from Rhode Island. It is something every state would welcome.
As is always the case in the financial world, one organizations misfortune is another entitys opportunity, so the crisis by no means indicates that the market for tax-exempt hospital bonds has dried up. For Baltimore-based T. Rowe Price, the bond insurers crisis represents a potential buying opportunity for us, says Marcy Lash, a vice president and fixed-income credit analyst for the mutual fund company. Since T. Rowe Price does all of its own credit work, assigning its own credit ratings to bond issuers, the company feels comfortable with its investments whether they are backed by bond insurance or not, she says.
Except for perhaps one or two anecdotal instances, the crisis has not reached the point where having bond insurance is worse than having nothing at all, S&Ps Arrick says. Along the same lines, the crisis hasnt immediately infected the credit worthiness of not-for-profit hospitals, and hasnt precipitated any changed ratings or outlooks for not-for-profit hospitals.
Hospitals are not making major changes to their debt loads just yet. More than anything, there are a lot more inquiries, Arrick says. We expect the flood (of actual changes) but were not flooded yet.