Early rumblings of the 2008 credit crisis pushed healthcare borrowers into a torrent of debt refinancing that year. Now, hospitals and health systems are bracing for another crush of deals, as a raft of bank guarantees on bonds sold during the crisis expire next year.
Almost renewal time
Letters of credit set to spike in 2011-13: analysts
Investors rely on bank guarantees, known as letters of credit, as insurance for tax-exempt bonds sold in daily, weekly or other short-term markets, where investors have the option to abruptly demand repayment. Letters of credit give borrowers access to bank coffers to buy out investors in the borrowers' bonds, if necessary. But letters of credit typically expire after one, three or five years—sometimes longer—and must be renewed.
Demand for such pledges surged during the credit crisis after a
$330 billion segment of the short-term market collapsed in February 2008 and a flood of borrowers converted debt to letter of credit-backed bonds.
Many healthcare borrowers face a crowded market for bank credit renewals in 2011.
An analysis by the underwriter Citigroup shows demand is expected to creep upward this year but spike sharply next year and remain high in 2012 and 2013. Healthcare bonds totaling $4.37 billion must secure new bank credit agreements this year compared with $1.95 billion last year and $14.4 billion in 2011,
Citigroup found in an analysis of Thomson Reuters figures.
Borrowers face the risk banks or the economy could stumble and squeeze credit capacity next year, according to healthcare finance executives. Under those conditions, surging demand could give banks leverage to demand
higher prices, additional business or deny renewals, as was the case during the credit market upheaval.
University Hospitals in Cleveland has already begun talks to extend one letter of credit set to expire in 2011, said Bradley Bond, the system's vice president of treasury.
The system, which owns seven Ohio hospitals and manages one more, did so in an effort to get ahead of the wave of credit agreements that also end next year. “It's almost like getting in line at an amusement park,” Bond said. “You just have to get in line and be in line.”
Healthcare borrowers with such short-lived bank credit agreements are facing continued uncertainty over banks' financial health and investors' tolerance for bank distress, he said.
Investor confidence in hospital bonds falters when banks struggle. “We are tied to banks more than one would think for a hospital,” Bond said. “That's the risk today with the banking industry.”
University Hospitals refinanced another $50 million in February with a letter of credit from a shaky bank that was scheduled to expire next year. But last month's move to refinance the $50 million was prompted by the desire to jettison the weak bank, not by worry about the crush of borrowers that will renew bank credit letters next year, Bond said.
The bank, which Bond declined to name, was one of four to provide credit guarantees for $237 million that University Hospitals issued in variable-rate bonds during early 2008.
The system sought to spread its credit guarantees among multiple banks to hedge against risk of bank distress, Bond said. University Hospitals also staggered the length of its credit agreements to terminate in 2011 and 2013.
Bond said the system cultivates its relationship with banks and monitors its banks' credit strength. February's refinancing reduced or limited exposure to banks with weaker credit and curbed University Hospitals' overall exposure to short-term debt.
One of the later agreements has been extended two years and Bond said he is confident he will secure extensions for the remaining letters of credit.
Frank Taylor, a managing director with healthcare investment bank Ponder & Co., said hospitals and health systems in the market to renew letters of credit have seen attractive prices and banks willing to commit to longer pledges.
Should banks and the economy improve, borrowers could find more favorable conditions, as has been the case this year for stronger-rated hospitals and health systems seeking renewals, said Andrew Majka, chief operating officer for healthcare financial adviser Kaufman, Hall & Associates. Borrowers that successfully extend credit deals ahead of the bubble or opt to exit the market entirely could also alleviate demand, he said.
David Mazurkiewicz, chief financial officer for Flint, Mich.-based McLaren Health Care Corp., said the wave of renewals has increased pressure to deliver strong operating returns at the seven-hospital system. Borrowers with healthier balance sheets face less risk that banks won't renew credit support.
The system has roughly $167 million in bonds with credit backing that expires in August 2011. Mazurkiewicz said he has had continued contact with banks, and McLaren officials hope to renew credit agreements as long as rates are attractive and deals are reasonable.
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