Even well-funded, financially strong health systems braced for what amounts to a run on the bank in recent weeks.
The investor panic in the credit markets has made once unlikely events possible, increasing the odds that 24 strongly rated healthcare borrowers will be forced to rapidly pay back billions of dollars to short-term investors or risk default, according to a report issued by Moodys Investors Service last week.
The two dozen borrowers rated by Moodys have issued $8.4 billion in short-term bonds and commercial paper with a promise to use their own cash to take debt off investors hands when no one else will. Bank deals typically provide this backing, reducing the risk of a sudden, severe drain on cash for borrowers.
Already three systems have been forced to buy back their bonds: six-hospital North Mississippi Health Services, Tupelo; three-hospital NorthShore University HealthSystem, Evanston, Ill.; and five-hospital Riverside Health System, Newport News, Va., Moodys said.
Moreover, the list of systems that could be forced to buy back their bonds under recent credit market conditions includes such names as Ascension Health, St. Louis, the largest U.S. private not-for-profit system with
77 hospitals, and Catholic Health Initiatives, a 60-hospital system in Denver. Ascension and CHI account for $2.7 billion and $1.2 billion of self-backed debt, respectively, Moodys said. Spokespersons for the two Catholic healthcare
giants said officials were unavailable for comment.
In less eventful years, the risk of such a cash hemorrhage was remote. These are things you never, ever expect to see happen, said Gerald Wages, executive vice president and treasurer for North Mississippi Health Services, one of three systems that recently faced just such an event.
NorthShore paid out $200 million, according to the ratings agency. Officials at the hospital declined to comment on the deal, a spokesman said.
Riverside used $200,000 in operating cash to buy up the portion of its debt that failed to sell, Moodys said. A Riverside official did not respond to a request for comment.
Tax-exempt short-term bonds, known as variable-rate demand notes, are typically sold each day or week, leaving borrowers hours or days to come up with the money when investors want out and no new buyers emerge.
Reaction among the systems to the potential for a sizable and swift drain on cash has been mixed, said Lisa Martin, a Moodys senior vice president. Some have monitored debt markets and investments closely and have knowledgeable, well-staffed treasury departments that are prepared to move millions of dollars on demand. Others have been lucky, she said. I think they are learning as they go.
Global credit unrest and a weakening economy have raised threats to not-for-profit healthcare liquidity on several fronts, but not all pose the same danger to balance sheets. Risks from self-backed short-term bonds or commercial paper rank very high, Martin said. With self-liquidity, theres no time for error, she said.
Stakes are high should borrowers fail to return borrowed cash on time, Martin noted. In extreme cases, a bungled payment could trigger default on debt owed to multiple investors, not just those demanding a payout. Default could allow trustees to demand full repayment much earlier than originally planned.
Despite the risks, Martin said more systems with no experience handling such cash demands are considering self-backed bonds as an option because of continued paralysis in the market for long-term fixed-rate bonds, an alternative to short-term markets that allows borrowers to lock in an interest rate for decades.
Access to long-term bonds froze after news that the failure of Wall Street giant Lehman Bros. Holdings sharply reduced assets in the Reserve Primary Fund, a money market fund. Panicked investors fled money markets, which are significant investors in tax-exempt bonds, (Oct. 20, p. 8).
North Mississippi Health had used its own cash for the first time to back $75 million in bonds after an auction market for tax-exempt bonds collapsed in February (March 24, p. 8).
In late September, investors tendered $20 million of North Mississippis bonds and gave the system seven days to settle up. Officials waited to see whether new buyers would emerge and $10 million sold before the pay day, Wages said. With a half-hour before its deadline, the system bought the rest.
Wages described the transaction as a chance to test the procedure. Success should signal that investors need not fear short-term debt markets or lending to Aa3-rated North Mississippi, he said. That confidence is important.