Not-for-profit healthcare bonds escaped the kind of abrupt and costly upheaval seen in 2008 in the week that followed one major ratings agency's downgrade of U.S. credit.
Wait and see
Downgrade may affect some more than others
The nation's credit strength—no longer seen unanimously as sterling, with Standard & Poor's breaking from the other two major agencies to notch its rating down to AA+ from AAA—has long been used to guarantee debt for small and rural hospitals. More recently, it has provided backing for hospital bonds with credit guarantees from faltering commercial banks. And hospitals that refinance bonds to take advantage of lower interest rates typically buy U.S. Treasuries when prior investors must be paid back gradually.
But Standard & Poor's downward-revised view of U.S. credit, based on the agency's “pessimistic” view of political wrangling that has mired fiscal policymaking, mattered little to most healthcare borrowers that rely on federal credit guarantees, said industry executives. Future borrowers, however, could see slightly higher interest rates because of the country's split rating, they said.
Nonetheless, a few hospitals and health systems could see interest rates creep upward immediately. Most Federal Home Loan Banks, which guarantee a small number of hospital short-term bonds, also were downgraded to AA+ by Standard & Poor's.
In 2008, Congress temporarily allowed the Federal Home Loan Banks to extend additional credit guarantees to hospitals (Feb. 28, p. 18).
Of the 187 deals that received Home Loan Bank backing, 31 involved hospitals and other healthcare borrowers. One of these was the Medical Center of Central Georgia, a 596-bed hospital in Macon.
Janie Poulnott, a Medical Center spokeswoman, said in an e-mail that hospital executives will watch the market for its reaction. Interest rates for the Medical Center's bonds, sold weekly, increased to 0.18% on Aug. 3—three days after the federal debt-ceiling agreement was reached and two days before Standard & Poor's downgrade—and the rate remained the same Aug. 10. That's compared with a rate of 0.07% on July 27.
Meanwhile, for outstanding debt backed by the Federal Housing Administration, the downgrade “shouldn't change anything” said Scott Moore, a managing director with Red Mortgage Capital, an investment bank and financial advisory firm.
Interest rates are locked when borrowers, typically small or rural hospitals, close deals for financing with mortgage insurance from the Federal Housing Administration, Moore explained. Borrowers' rates don't rise if the mortgage insurance credit drops, he said.
Effingham Hospital in Springfield, Ga., went to market with $30 million last December and scored significantly lower interest rates with Federal Housing Administration mortgage insurance than it would have otherwise, said Ed Brown, the hospital's chief financial officer.
Thomas Green, president and CEO of Lancaster Pollard, a healthcare investment bank and investment adviser, said borrowing costs could climb for hospitals that seek future FHA backing, but by how much—if rates rise at all—is difficult to discern because trading for such bonds is thin.
Hospitals with outstanding deals to refund bonds using U.S. Treasuries or State and Local Government Series securities (special Treasuries popularly known as slugs) should not be affected by the rating change, said Jim Blake, a managing director with financial adviser Kaufman Hall in New York.
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