The worst of the credit crisisto datehad not yet unfolded when Mountain States Health Alliance agreed to invest $132 million in an Abingdon, Va., hospital for an ownership stake.
But as Mountain States readied to ask investors for cash to close the deal, an already shaky Wall Street fell apart. Investors panicked as governments across the globe scrambled to hold financial markets together. Bond markets for not-for-profits, including health systems such as Mountain States, froze.
The Johnson City, Tenn.-based health system is one of many forced to wait anxiously since mid-September for the long-term bond market to re-emerge. Investors have returned, but cautiously, creating a backlog of bonds that have yet to be sold as markets enter the typically sluggish month of December, finance experts said.
The year is ending as unpredictably as it began for tax-exempt borrowers. Interest rates soared for many in February after exposure to risky mortgages undermined investor confidence in insurers that guaranteed certain municipal bonds. Investors balked at buying the insured debt, sparking the collapse of a $330 billion auction market for tax-exempt borrowers. The year enters its final month after a string of bank failures and buyouts that again sent interest rates on municipal bonds soaring. In the coming year, the economic downturn and shaky financial markets are expected to make access to capital for municipal borrowers harder to come by and more expensive, particularly for those with financial stress of their own.
Mountain States successfully sold $88 million in municipal bonds last week. Thats less than the $220 million issue originally planned, but enough to complete joint ownership of Johnston Memorial Hospital, Abingdon, after negotiations with the 135-bed hospitals board, said Marvin Eichorn, Mountain States senior vice president and chief financial officer. For Eichorn, a 31-year veteran of healthcare finance, investors reluctance to buy as much debt as the system was ready to borrow was a first, and it underscored the challenges facing not-for-profit borrowers this year. There was never an issue whether you could borrow anything at all, he said, referring to the paralysis that gripped bond markets in mid-September.
To close its deal with Johnston Memorial and begin construction on a replacement hospital, the nine-hospital system pushed to issue long-term bonds before bond markets slow in mid-December, Eichorn said.
Mountain States will return to debt markets early next year to finance the rest. With luck, interest rates will have eased in the meantime, Eichorn said. The system, which is rated BBB, planned for rates around 5.75% but ended up slightly below 8% on Nov. 20.
Investor interest in Mountain States deal last week, which was managed by Merrill Lynch & Co., suggests the long-term market is gradually returning, though its still tenuous, said Edward Malmstrom, a Merrill Lynch managing director and manager of its municipal healthcare group.
Investors appetite for bonds fades as credit ratings decline, he said. The earliest healthcare borrowers to return to long-term bond markets were strongly rated systems, including AA-rated Providence Health & Services in Seattle, a deal Merrill Lynch managed. I wouldnt say the gates opened, but certainly, for good quality credits and names, it went from being a nonexistent market to being a decent, but still not great market, Malmstrom said. Access to long-term, fixed-rate debt continues to come at a price. Borrowers must be willing and able to tolerate higher interest rates to find willing investors, Malmstrom said.
As it eases, the logjam could push up interest rates as borrowers demand for debt outstrips investors appetites. Its a classic supply-and-demand curve, said Kenneth Kauffman, the managing partner for healthcare financial consulting firm Kauffman Hall. That means would-be borrowers must consider how much they are willing to pay to borrow, and how long they are willing to wait out higher interest rates.