Its still an unproven market, says James Birdwell, a managing director in the public finance group for investment bank Morgan Keegan & Co., the nations largest underwriter of bank-qualified bonds, according to Thomson Reuters. Banks that previously invested in such bonds largely did so for government borrowers, he says, and therefore small or midsized banks may lack experience evaluating the risk of tax-exempt healthcare debt, particularly for the small hospitals most likely to seek less than $30 million in capital.
Healthcare borrowers have begun to explore bank-qualified bonds but so far deals are scarce, according to finance insiders. In Indiana, 62-bed Major Hospital in Shelbyville is preparing an upcoming bank-qualified bond deal to take advantage of expanded access under the stimulus act, said Jessica Ewing, a spokeswoman for the Indiana Finance Authority, in an e-mail. The authority is a state financing agency that issues municipal bonds.
Proponents consider the expanded bank-qualified bond capacity as one of several remedies for smaller hospitals trying to gain entry to constrained credit markets, says Robert Donovan, executive director of the Rhode Island Health and Educational Building Corp., the states finance authority for tax-exempt hospitals and schools seeking access to municipal credit markets.
Donovan, who also oversees advocacy for the National Association of Health and Educational Facilities Finance Authorities, says activity in Rhode Island suggests borrowers and banks see advantages to the temporarily expanded capacity for bank-qualified deals.
The state authority issued three bank-qualified bondsnone for hospitals and health systemsthat exceeded the former $10 million limit, including one for $26 million, he says. Banks snapped up some of the publicly offered bonds, he adds. Its definitely opened up banks as an investor base.
Investors willing to buy long-term municipal bonds fled for the safety of cash in late 2008. Municipal bond funds hemorrhaged more than $14 billion in assets between September, when Lehman Bros. filed for bankruptcy and the credit crisis erupted, and December, according to the Investment Company Institute, a Washington-based trade group.
The market has slowly opened since January as investors have returned (cash flowing back into municipal bond funds has surged by $20.5 billion from the beginning of the year through mid-May), but access and the cost of capital continue to be problems, particularly for smaller or weaker hospitals (May 25, p. 14).
While bank-qualified bond investments fell steadily from $18.4 billion in 2005 to $15.2 billion in 2008, according to Thomson Reuters, that total spiked in the first five months of 2009 to $12.4 billion.
Wiregrass Medical Center in Geneva, Ala., used bank-qualified bonds to enter the markets in January under pressure from the bank that provided a letter of credit for the hospitals entire $9.8 million in outstanding debt. Gloria McGowan, chief financial officer for the 67-bed hospital, says Wiregrass came away with an average interest rate of 5.8%, a rate comparable to interest on the hospitals variable-rate bonds before troubled credit markets skewed rates.