Not-for-profit healthcares exodus from the formerly popular auction-rate securities market is under way in earnest.
The credit turmoil roiling the banking industry and bond insurers has upended borrowing by hospitals who issued long-term debt to short-term investors through frequent auctions (Feb. 25, p. 6). Nervous investors fled the auction market in mid-February, and as demand plummeted, interest rates skyrocketed. Healthcare borrowerswhich frequently turned to the market to diversify their debt portfolio and lower borrowing costshave been scrambling to exit the market and curb costs in the meantime.
Some major not-for-profit healthcare systems have moved to restructure billions of dollars in auction-rate debt in recent weeks. Catholic Healthcare West won emergency approval to refund up to $2.2 billion while Ascension Health, the largest private not-for-profit health system, alerted analysts it plans to refund $1.4 billion in auction-rate securities.
Trinity Health, Novi, Mich., has promised investors it will use its own cash or other sources of credit to buy back debt should no one bid at future auctions. The guarantee has helped attract investors who otherwise feared being unable to liquidate their holdings, driving down rates on Trinitys $597 million in auction-rate debt, said James Bosscher, Trinity Healths vice president of treasury.
Meanwhile, the system moved to hold auctions far less frequently. The strategy is a short-term fix as Trinity considers restructuring its debt in the fall, Bosscher said. We have every reason to believe that it will be successful, he said. Since March 4, Trinity has converted auction-rate securities totaling $400 million to the new terms at 12 auctions, he said. The maneuver gives Trinity flexibility to monitor the market, but may come at a cost if interest rates rise for other debt structures, such as fixed-rate bonds, he said.
The Catholic system, which owns and manages 43 hospitals, saw its interest rates jump as high as 12% before settling to 7% or 8%. It was extremely important to move quickly, Bosscher said. I cant exaggerate how difficult these markets have been over the last month or so.
Regulators appeared to clear one hurdle in mid-March for health systems seeking a hasty fix for the unexpectedly high interest rates. But the uncertainty that shook banks and investors during the past month may hinder healthcare borrowers seeking to get in on auctions. The Securities and Exchange Commission issued a letter on March 14 that said borrowers may bid on their own debt under certain conditions. Under the guidance, borrowers must disclose bids before and after an auction.
All Childrens Health System, which owns 216-bed All Childrens Hospital, in St. Petersburg, Fla., backed out of plans to bid on its debt after its auction broker-dealer balked without further clarification from the SEC. I wouldnt be a good CFO if I didnt say that this whole process wasnt totally frustrating, said Arnold Stenberg, All Childrens senior vice president and chief financial officer. All Childrens expenses climb with each passing day, he said. Weve found it extremely difficult to act in a timely fashion.
Stenberg said the hospital pushed to enter the auction and was disappointed by the delay. Securities regulators issued guidance on a Friday. That left All Childrens officials roughly 48 hours to comply with regulators provision that borrowers publicly release plans to bid at least two days prior to an auction. Lawyers, bankers and hospital executives raced to notify investors in advance of a weekly auctionheld each Wednesdayon debt totaling $61.6 million. Executives hope to post a second public notice in time to join a March 26 auction, Stenberg said. Roughly 80%, or $200 million, of the hospitals debt was issued as auction-rate securities. Stenberg said the remainder will be converted to variable-rate demand bonds.
Meanwhile, state financing authorities, led by Massachusetts, have moved quickly to ease approval for borrowers seeking to restructure their debt. In recent weeks, California financing officials held an emergency meeting to approve refinancing plans for six major health systems seeking to refinance or convert up to $4.6 billion combined.
Catholic Healthcare West, a San Francisco-based system with a hefty $8.8 billion capital plan, won approval to refund up to $2.2 billion variable- and auction-rate debt at the March 11 emergency meeting. Investors mid-February panic drove up interest rates on the Catholic systems auction-rate issue that totaled $676 millionmade roughly nine months before the market collapsed. One weekly auction jumped to 11% from 3.1% in the space of two weeks before settling between 7% and 8%, Bloomberg figures show. Other weekly auctions spiked to 10% or 12% before easing back down to 6% or 7%. Rates for the 39-hospital systems less-frequent auctions, held every 35 days, climbed to 6% and 7% from 3% and 4%.
In a prepared statement, Catholic Healthcare West said the system has carefully diversified its investment and debt portfolios, limiting its exposure to auction-rate securities. Although the market has settled considerably since the peak disruptions in mid-February, CHW is implementing a debt restructuring plan aimed toward a more sustainable capital structure and mitigation of market risk, the statement said.
Anthony Speranzo, senior vice president and chief financial officer for St. Louis-based Ascension Health, said the system was not significantly affected because its interest rates were tied to an index that prevented the spiking rates that others experienced. Nonetheless, Ascension will exit the market and jettison its bond insurance, relying instead on the systems financial strength and strong credit rating to borrow. Ascension is expected to convert $1.4 billion to variable-rate demand bonds and short- and intermediate-term fixed rate bonds.
I dont know where this ends up, Speranzo said of the auction-rate market. It wouldnt surprise me if it just went away. It wouldnt surprise me if it stays in place in another form, he said. Speranzo said the recent credit crisis underscored how financial markets are intertwined and interdependent.
No one segment of this economy is immune from the economic volatility that were seeing in the capital markets right now, he said.