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Credit crisis doesn't sicken local hospitals

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JAMES P. LEUTE
April 3, 2008
— Hospitals in southern Wisconsin have been able to sidestep a crisis that’s whipping through the nation’s credit markets and sending interest rates on some bonds skyward.

Other Wisconsin institutions weren’t as fortunate.


Aspirus of Wausau saw its penalty rate jump to 18 percent when one of its auctions failed in February. That added $160,000 a week to the hospital’s interest bill, the Milwaukee Journal Sentinel reported.


The culprit is the $330 billion auction-rate securities market, the latest to suffer as the doomed sub-prime mortgage market rattles the credit ratings of the world’s largest bond insurers.


Janesville-based Mercy Health System took a different route last year when it wanted to raise $34 million to refinance some earlier bond issues. It still sold bonds, but it didn’t opt for the auction-rate variety.


While the interest rates on the bonds sold by Mercy are variable, they aren’t set at auction. And they are backed by a strong letter of credit, which provides the insurance that’s missing or in question with some of today’s troubled auction-rate securities.


“With our strong credit history, we were able to get good letters of credit and a pretty good rate,” said Joe Nemeth, chief financial officer of Mercy Health System.


A solid letter of credit also saved Beloit Memorial Hospital, which until February had a portion of a $51 million bond issue in auction-rate securities.


The hospital was able to convert its 2006 issue to one that is outside the auction markets and is backed by a letter of credit, which provides investors with a greater sense of security, said David Bolen, a hospital vice president.


“Ours never failed at auction, but we were seeing interest rates going up,” Bolen said, noting that the rate on the hospital’s bonds nearly doubled to 6.5 percent before it restructured its financing.


Bolen said Beloit Memorial was fortunate to get out when it did. As the crisis has widened, borrowers have had difficulty getting letters of credit from banks, and when they have, the cost has gone up significantly.


The School District of Janesville’s recent sale of $70 million in bonds is immune to the problem because it was sold as a general obligation bond issue with a fixed interest rate over its life.


HOW IT WORKS

In Wisconsin, hospitals and colleges sell tax-exempt bonds through the Wisconsin Health and Educational Facilities Authority. Sometimes sold as auction-rate securities, they allow hospitals, governments, municipal utilities and others to borrow long-term money on short-term interest rates.


That’s because rates are reset in investor auctions every seven to 35 days. If enough investors don’t bid for the bonds, the auction fails and the bonds fall into a default category that carries a penalty rate.


In the past, banks and credit houses have jumped in to buy what was necessary to save the auction, and failed auctions were rare. Between the inception of the auction-rate market in 1984 up to 2006, the financial information firm Bloomberg reported just 13 failed auctions. But on March 4 alone, 521 auctions failed.


Many of those former buyers are the same companies racked by the sub-prime mortgage mess, making what was once an inexpensive alternative to traditional long-term debt much more expensive because of auction defaults and high penalty rates.


“It has nothing to do with the credit worthiness of the borrower,” said Joe Nemeth, chief financial officer of Mercy Health System. “It has everything to do with credit worthiness of the insurers of the credit.”



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