What will take the place of auction-rate debt?
The latest four-letter word in financing hospitals is really an 11-letter word: auction-rate. The large majority of hospitals and health systems that financed through such debt over the past several years woke up to a rude shock this past spring when the unanticipated happened due to the wider credit crisis: Auctions failed. That meant that institutions that were used to paying minuscule interest between 1% and 2% on the debt vehicles were suddenly faced with rates as high as 17% over the short term.
Many scrambled to exit the market by attempting to refinance the debt into more traditional fixed- and variable-rate debt, but generally only the highest-rated credits were able to do so successfully. Now that there’s some space and stabilization from the recent credit crisis, many hospitals that used auction-rate debt and took a wait-and-see approach may still be in a decent position regarding refinancing or simply holding on to their auction-rate debt.
"The auction bidding process is not failing anymore," says Lisa Goldstein, senior vice president and team leader for the healthcare public finance group at Moody’s Investors Service.
So did some hospitals and health systems overreact by getting out first and asking questions later?
"No," says Goldstein. "This dislocation was highly unusual." Hospitals that were able responded quickly by refinancing out of the uncertainty, she adds, and once bitten by unforeseen risk, many experts don’t see a return to a market for debt that’s refinanced periodically, such as every 7, 14, or 28 days, whether you call that debt auction-rate or not. "Most hospitals don’t budget for these spikes, so some were in a tough spot," she says.
Some still are. Many still have auction-rate debt that is rated AAA from bond insurers, many of whose balance sheets still haven’t been downgraded by credit rating agencies such as Moody’s. "Financial Security Assurance, for one, is still AAA," says Goldstein. "This may have been debt that was recently issued, so if they had just paid for the [insurance] premium, and in some cases had the ability and the resources to ride it out, they are taking a wait-and-see approach."
Further, many are refinancing auction-rate debt with commercial bank liquidity facilities—an expensive proposition. "That’s expensive because so many people are calling up the banks, there’s a lot of demand for this type of facility. So these orgs that are waiting may be waiting to see if bank rates come down."