For healthcare borrowers that finance construction and expensive technology with municipal bonds, upheaval from the credit crisis threatened lasting changes to the market. But another disruption—less volatile, but perhaps more fundamental—was simultaneously under way.
Forging stronger bonds
SEC seeking more transparency to aid investors
A push for greater oversight of not-for-profit borrowers by federal agencies has prompted new and proposed reporting requirements that stand to expand investors' and regulators' access to information about borrowers' finances and how tax-exempt bonds are used.
The Securities and Exchange Commission, which does not regulate municipal bond issuer disclosure, has used its authority over brokers, dealers and underwriters that buy and sell the debt to put forward rules recently that would expand the limited roster of bond and financial documents that must be released to investors.
The move follows an SEC rule, effective July 1, that consolidates all such disclosure on one publicly accessible Web site (emma.msrb.org) from the handful of repositories that previously charged for documents, a change that Mary Simpkins, senior special counsel in the SEC's Office of Municipal Securities, speaking in New York in September, described as a “seminal event” in the municipal market's history.
“It's a big deal,” she said at a meeting of the Securities Industry and Financial Markets Association.
It's not enough, says SEC Chairman Mary Schapiro, who introduced proposals in July that would expand reporting and require more rapid disclosure from municipal borrowers. “More needs to be done to put disclosure about municipal securities on par with disclosure about corporates,” she said at the time. Schapiro said she plans to work with Congress “to request enhanced SEC authority with respect to municipal securities disclosure. ...”
Meanwhile, not-for-profit bond issuers in tax year 2009 must complete for the first time an attachment to the yearly Internal Revenue Service filing for not-for-profits, the Form 990 Schedule K. Questions that were voluntary the prior year must be disclosed as of 2009, such as information on municipal-bond proceeds, private business use of tax-exempt financed property, and profit from investing tax-exempt bonds in higher-yielding securities.
Behind the effort are investors and regulators who say the municipal-bond market has outgrown its limited oversight, a failing that has been exacerbated by the credit crisis. Borrowers in the municipal market operate largely free of scrutiny and disclosure rules required of private borrowers, regulators say.
Disclosure and transparency give the market information needed for better decisions, Schapiro said last September at Georgetown University when speaking about the agency's reforms, including its push to regulate municipal-bond issuers. An uninformed investment is nothing more than a “high-priced lottery ticket,” Schapiro says.
Regulators say the need for greater disclosure has grown more critical following the volatility that erupted in municipal markets in early 2008.
One $330 billion corner of the municipal market that operated on the strength of bond insurers—not the underlying credit of borrowers—largely collapsed in February 2008 and sent many borrowers scrambling to convert the debt to variable-rate-demand bonds, which are exempt from SEC disclosure rules.
Among proposals introduced this summer, the SEC called for disclosure rules for borrowers that issue such variable-rate bonds, which allow short-term investors to demand repayment from borrowers, often on notice as short as one day or one week. “As the size and complexity of the market and the number of investors has grown” for variable-rate-demand bonds, “so have the risks associated with less-complete disclosure,” according to the proposed rule.
Under the rule, variable-rate-demand bonds would be subject to the same SEC regulations covering fixed-rate, long-term bonds, which state that brokers and dealers cannot buy or sell bonds without confirming that borrowers will disclose certain information to investors.
The proposal would also increase the list of financial information that must be released (View chart). One proposal would set a deadline for disclosure of 10 business days after an event. Another would add tender offers; bankruptcy filings; mergers or asset sales; and certain changes to the bond trustee.
Disclosure beyond required reporting among healthcare borrowers varies, though scrutiny of balance sheets has increased amid banks' ongoing distress and a weak economy, healthcare finance insiders and experts say.
Lisa Goldstein, senior vice president and healthcare team leader for Moody's Investors Service, says some healthcare borrowers have added more detailed information about how critical balance sheet measures compare with thresholds outlined in bond documents, or about deals with banks that provide credit and liquidity backing for variable-rate bonds. Goldstein says the credit crisis has heightened focus on disclosure to build credibility with investors, analysts and lenders.
Michael Blaszyk, chief financial officer at Catholic Healthcare West, or CHW, which owns or sponsors 38 hospitals, says disclosure, among other efforts that improved executives' ability to project and meet financial targets, played a role in rebuilding the system's standing with analysts and investors during its turnaround earlier in the decade, and he credited strong investor relations with positioning CHW to withstand recent credit market upheaval.
San Francisco-based CHW is among the not-for-profit systems to mimic publicly traded companies with investor calls or webcasts to review performance, strategy and markets with investors and analysts. Blaszyk, who is also the system's executive vice president and chief corporate officer, says as the credit markets and economy rapidly deteriorated last fall, executives readily disclosed to investors the system's strategy to weather any violations of its bond deals if the volatility had so significantly
depleted cash that liquidity plunged below agreed levels—as was the case for some systems.
Blaszyk says the system's executives met with investors and flew to New York to field questions. Ultimately, the system escaped such a scenario, but Blaszyk credits the disclosure for allowing the system to secure leeway with investors should such an event occur.
He says investors have grown more knowledgeable and are seeking more detailed information from borrowers. “The transparency requirements between a public debt and municipal debt are going to close very rapidly,” Blaszyk says.
North Shore-Long Island Jewish Health System, which owns or sponsors 10 hospitals, bolstered its disclosure after shedding its bond insurance when the 1998 bankruptcy of Allegheny Health, Education and Research Foundation soured municipal-bond markets, says Robert Shapiro, senior vice president and CFO of the Great Neck, N.Y.-based system, which holds annual investor calls. Disclosure increasingly goes beyond numbers to strategy and market conditions, he says.
Alison Fleury, senior vice president for business development at San Diego-based Sharp HealthCare, says the five-hospital system already discloses financials for its variable-rate-demand bonds. “There's no reason not to,” she says. She sees the sense in other SEC proposals. “I felt, frankly, they're all reasonable,” she says.
Sharp also discloses its finances each quarter and voluntarily holds investor calls prior to going to market for debt, though if investors expressed interest, the system would begin holding annual calls, Fleury says.
Fleury was among the healthcare finance insiders to express concern with the SEC proposal to give borrowers a maximum of 10 days to report any required events. She contends 10 days is reasonable but in some circumstances, such as changes to bond trustees, borrowers must be first be notified by others.
The National Association of Health and Educational Facilities Finance Authorities has urged the SEC to expand the window for reporting to 30 days.
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