Bank distress continues to hinder access for healthcare borrowers and threatens costly volatility for those already in the market, despite demand from short-term investors for municipal bonds.
Hospitals borrowing harder
Variable-rate-demand bonds preferred as credit
One major player last week suffered a hit when analysts lowered the credit rating for SunTrust Banks. The Atlanta-based bank last year ranked among the top 10 providers of credit and liquidity guarantees for tax-exempt borrowers seeking access to short-term debt known as variable-rate-demand bonds, according to Thomson Reuters. Bank backing has grown more expensive and harder to secure thanks to the banking industrys consolidation and continued distress (Jan. 19, p. 8).
Investors require backing because variable-rate bonds typically allow lenders to exit the investment each day or week. Borrowers rely on banks for cash to buy back bonds until new investors can be found. But investor anxiety when banks falter can push interest rates significantly higher or leave borrowers with bonds no one wants, which forces banks to hold the debt and puts hospitals and health systems at risk of paying back the debt on a sharply accelerated schedule.
Those risks have drawn attention from Congress, where the House Financial Services Committee is expected to hold a hearing later this month on how the credit crisis has affected municipal bond markets and issuers. Legislation on the issue may be announced or introduced before the hearing, said Steven Adamske, a spokesman for the committee. One proposed fix to bolster the market for variable-rate-demand bondstemporary liquidity support from the governmentis under discussion, Adamske said, but it is too early to say whether it will be included.
Moreover, Federal Reserve Board Chairman Ben Bernanke told lawmakers in a March letter that the market may not survive as a significant vehicle for tax-exempt borrowers. The current financial crisis has exposed the vulnerabilities of the (variable-rate demand debt) market, raising questions about the desirability of its continuation as a significant vehicle for municipal finance, Bernanke wrote.
SunTrust Banks downgrade came as regulators prepared to release results of their analysis of the financial health of the nations largest banks.
Andrew Majka, chief operating officer at financial consultant Kaufman, Hall & Associates, said clients with SunTrust-backed bonds received tender notices from investors and he is working with clients to prepare should new investors balk at buying SunTrust-backed bonds. There is a lot of concern that in light of the credit downgrades and negative outlooks that the market will be severely limited for this debt, he said in an e-mail.
Majka said borrowers could see interest rates surge and be faced with hastily refinancing bonds at much higher interest rates should investors walk away and leave the SunTrust holding the debt. How quickly borrowers must refinance or pay back the debt varies according to contracts, but it can range from months to years, he said.
For hospitals and health systems able to secure solid backingor the financial heft to use their own credit and cash as a guaranteeinterest rates have plunged because investor demand has outstripped supply, said Don Carlson, vice chairman of healthcare financial services firm Ziegler Cos. The Securities Industry and Financial Markets Association Municipal Swap Index has not risen above 1% since late December 2008.
Were still seeing a good market for good banks, Majka.
In Des Moines, Iowa Health System in March refinanced roughly $245 million of its $623 million in variable-rate-demand bondsall of its outstanding debt. Iowa Healths President and CEO Bill Leaver said the system rejected the long-term-bonds market for the more attractive variable-rate-demand bond rates. The 10-hospital systems effective interest rate, including hedges known as swaps, is 4.3%. Leaver said banks that guaranteed the credit and liquidity on Iowa Healths recent bonds issue sought more money for the letters of credit and set more specific bond convents and reporting requirements.
Borrowers have seen interest rates fluctuate with investor anxiety since the credit
OSF Healthcare System saw interest rates on its variable-rate-demand bonds surge as panic consumed credit markets last fall after investment bank Lehman Bros. Holdings filed for bankruptcy. Rates receded within weeks, but not all of OSF Healthcares bonds saw relief, said Dan Baker, chief financial officer for the six-hospital system based in Peoria, Ill.
Roughly $70 million in variable-rate demand bonds backed by the troubled bank National City Bank peaked at 9.75%, settled around 6%well above the 2% prior to the crisisand did not fall until PNC Financial Services Group closed in December 2008 on its deal to acquire National City, Baker said.
Baker said investors appear satisfied with the four major banks that back liquidity for the systems $390 million outstanding variable-rate-demand bonds, including $125 million issued in late March. He noted a little bit of noise in interest rates, but with interest rates below 1%, the system can absorb minor fluctuations, he said. Baker said banking industry stress prompted the system to further spread its business among multiple banks, and OSF Healthcare will not need to renew any of its bank guarantees for at least one year so hopefully we have some time to get past this, he said.
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