Europe's debt crisis has roiled stock markets this year and that turmoil left its mark on not-for-profit hospital financial statements in September. But the far-reaching consequences of European distress concern some outstanding hospital bonds as well.
Europe's troubles ripple across the ocean to U.S. hospital bond markets
Catholic Health Initiatives used its large and complex November bond deal to swap out German banks that provided liquidity for nearly $200 million in bonds for domestic banks.
Investors view bank liquidity agreements as insurance that they will be able to cash out of bonds whenever they choose—even when no other buyers emerge to take bonds off their hands. Banks that struggle (an ongoing problem for healthcare borrowers since the credit crisis) mean more risk for investors, who then demand higher interest from healthcare borrowers as compensation for greater risk.
Linda MacDonald, the system's vice president of treasury, said the interest on some Catholic Health Initiatives bonds rose about six months ago after the downgrade of one German bank. “We saw that as a warning sign and took the opportunity to make some changes” in November, she said.
The switch to domestic banks from German ones was just one component of the uncharacteristically complicated deal for the Englewood, Colo.-based system, she explained. Catholic Health Initiatives, which owns 55 hospitals, ranked as the third-largest not-for-profit system, by revenue, in Modern Healthcare's most recent survey of providers.
The $859 million borrowing deal, which closed in early November, included $526.1 million in fixed-rate bonds and another $158.2 million in variable-rate bonds known as Windows, which allow borrowers an extended period, if needed, to refinance or buy back debt than is typical in short-term markets. Catholic Health Initiatives also borrowed $125 million directly from a bank and converted another $50 million to take advantage of more favorable terms.
MacDonald noted the multipart financing, including exiting the German bank guarantees, was a reflection of the turmoil in financial markets during the past few years.
You can follow Melanie Evans on Twitter: @MHmevans.
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