Credit problems continue to squeeze not-for-profits

Wouldn't it be nice if the financial markets took their medicine and calmed down quickly after a debacle like the subprime mortgage crisis? Sadly, that's not how things work, as the latest credit issues facing not-for-profits demonstrate. First, in February, auction-rate bonds took a beating. Now variable-rate demand bonds, another staple of not-for-profit financing, are no longer as accessible a vehicle they were before.

With credit insurers like MBIA and Ambac Financial losing their own credit ratings, their coverage isn't doing much to bolster bond ratings for non-profit hospitals. In fact, in some cases, credit insurers are dragging down the credit rating of financially-secure hospitals. For example, the interest rate on MBIA-insured variable rate debt issued by the University of Pittsburgh Medical Center shot up to 7 percent. Without the insurance, meanwhile, the rate might have been 2 percent. In response, the UPMC system dropped its insurer and relied on its bank's credit to attract investors to a $75 million offering.

Seeking bank backing has its own price, however. When Memorial Hospital & Health System of South Bend, IN approached its bank to back its $36 million variable-rate demand bond issue, the bank demanded fees twice as high as they had previously been. What's more, the hospital system had to agree to shift other parts of its banking business to its new financial partner.

To learn more about the latest round of bond-financing concerns:
- read this Modern Healthcare article (reg. req.)

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