It seems like not-for-profit hospitals just can't catch a break when it comes to bond issues. The latest pain to afflict such bond holders comes from the squeeze placed on them by changes in the "swaps" method of managing the overall interest costs on their variable-rate bonds.
Under this system, hospitals typically pay a fixed rate to a counterparty and get a floating rate in return, experts say. In theory, for complex reasons, the floating rate they get cancels out the floating rate they pay, which should leave them with a lower fixed rate.
The bottom line on all of this is that, as with auction rate bond issues, the usual dodge just isn't working any more. With swap rates falling from the level at which non-profit hospitals wrote their deals, they now have to put up a huge chunk of cash just to keep the deal afloat. Sometimes, the cash can be as much as 10 percent of the swap, or, say, $10 million on $100 million, notes one industry analyst.
The net result of all of this isn't just hospital CFOs with migraines, it's also falling ratings on hospital debt. For example, West Penn Allegheny Health Care System has now found that its Moody's Ba3-rated junk bond debt trading at a ghastly 48 cents on the dollar. As ratings agencies like Moody's and Standard & Poor's continue to lower ratings on hospital debt, there's could very well be a cascade of hospitals defaulting in the first or second quarter of next year, some observers predict.
To learn more about the non-profit hospital debt conundrum:
- read this Wall Street Journal piece (sub. req.)
Related Articles:
Moody's downgrades 18 hospital bond ratings in two months
Obama healthcare plan a plus for hospitals, Moody's says
Moody's ratings changes could raise healthcare credit ratings
Bond buy-backs could stress hospitals' liquidity, Moody's says