As Auction Gavel Comes Down, Interest Rates Go Up for Hospitals

As Auction Gavel Comes Down, Interest Rates Go Up for Hospitals

Source: Associated Press Author: Theo Francis Published date: 2008-03-15 Clicks:

What are non-profit hospitals doing investing in the obscure — and lately troubled — credit products known as auction-rate securities?

Like many nonprofits, they’ve been using the financial instruments to raise money on the cheap. Everything was hunky-dory while investors kept lining up to buy the stuff. But there was a little catch: Interest rates on the securities are reset at auctions held as often as once a week.

When investors got nervous about the bond insurance backing some of the securities, some auctions failed and interest rates went through the roof. Rates, in some cases, jumped from the low single digits to 10% or more in just a week.

Now Congress is holding hearings to sort the mess out.

Only last month, University of Pittsburgh Medical Center saw interest rates on some of its debt jump to 17%, meaning an extra $605,000 a week in interest costs. In Chicago, Swedish Covenant Hospital saw its monthly interest-rate payment jump to $950,000 in February from a historical average of $600,000. As a result, the 333-bed facility is looking to refinance $100 million of debt, about $53 million of it in the form of auction-rate securities. For context, Swedish Covenant’s total revenue is about $850 million, according to American Hospital Directory. Several other issuers have felt the sting as well. (See recent articles here and here.)

Analysts say there’s no broad crisis for health-care borrowers just yet. For one thing, auction-rate issuers tend to be strong enough to get a high credit rating on their own or to attract the interest of bond insurers. In addition, most auction-rate notes have conversion mechanisms, letting the issuer turn them into long-term debt or something called variable-rate demand bonds, which haven’t been hit as hard.

Beyond that, hospitals can refinance their debt. Even tripling interest payments for a few weeks shouldn’t break most hospital budgets, says Jeff Schaub, a nonprofit health-care anaylst at Fitch Ratings in Chicago.

Even if the auction mess is temporary that doesn’t make it fun. “This becomes an unanticipated restructuring of the balance sheet,” Swedish Covenant CEO Mark Newton told Health Blog after testifying before the House on Wednesday. (You can read his testimony here.) Refinancing is distracting and expensive. Swedish Covenant expects to pay $1 million in fees to fix its auction-rate problem. “I would much rather spend this money on patient care,” Newton said.

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