Advance refunding—issuing a tax-exempt bond to refund an existing one—used to be a not-for-profit hospital’s screwdriver, a tried and true instrument for managing debt found in just about every chief financial officer’s toolbox.
Since the Tax Cuts and Jobs Act disallowed that strategy at the beginning of 2018—a change many are still working to reverse—financial advisers, bankers and lawyers predict this year some not-for-profit health systems will consider a portfolio of alternative maneuvers they may not have thought about before. That would include so-called Cinderella bonds, multistep derivatives and plain old vanilla swaps.
“From an economic standpoint, and just a pure market standpoint, I would say it’s probably a pretty good time to look at these kinds of alternatives,” said Eric Jordahl, a managing director with Kaufman Hall.
Some of the moves are relatively simple—like taxable advance refundings or direct placements with banks—while others are more complicated. Interest rate swaps, in which two parties agree to exchange generally fixed interest rate payments for variable-rate payments, were shunned after health system investors took a hit from them during the Great Recession.
More esoteric methods involve selling a bond that won’t be paid for until close to the call date of the existing bond it’s designed to pay off, or selling a taxable bond that becomes tax-exempt in the future. Experts believe systems may pursue the latter strategies, which tend to carry more risk, for bonds that are up for call in 2020 or 2021.
“It’s not any sort of legal gymnastics to get around what Congress implemented,” said Brian McGough, a managing director in Ziegler’s healthcare investment banking practice.
“These alternatives have always existed. But with advance refundings going away, folks have revisited some of those tools and probably will continue to look at those alternatives from time to time,” he added.