“That's our goal now,” he says. So when officials considered how best to refinance a loan, they looked for other options, which include fixed-rate bonds and private placement with other investors.
Banks competed aggressively for the system's business as they made their first direct placement, he says. Johns Hopkins pursued such a deal for the first time because direct bank deals were not previously as available or as cheap.
“If they were available, they weren't available at a good price,” Erdman says.
Three of eight banks offered bids that were less costly than letter of credit deals. Johns Hopkins ultimately closed the direct bank deal for less than a letter of credit, he says.
The direct deals aren't without risk. Banks typically agree to deals of three, five or seven years and hospitals may be forced to refinance. “Markets change,” Erdman says. Demand from borrowers or bank appetite for direct deals could disappear in coming years.
Banks too may be looking to move away from letters of credit.
Joseph of Wells Fargo says experience during the nation's recent financial upheaval made the direct bank deals more attractive.
Banks and borrowers developed a “shared fear” that letters of credit could change borrowing costs and demand on balance sheets overnight, he says. When investors no longer want hospital bonds, banks must honor letters of credit by buying up the debt—as was the case during the nation's recent financial upheaval in 2008 and 2009. Banks must abruptly take debt on the balance sheet. Hospitals and borrowers must refinance or quickly pay back the bank.