Al­most re­newal time

Let­ters of credit set to spike in 2011-13: an­a­lysts

Modern Healthcare - - The Week In Healthcare - Me­lanie Evans

Early rum­blings of the 2008 credit cri­sis pushed health­care bor­row­ers into a tor­rent of debt re­fi­nanc­ing that year. Now, hos­pi­tals and health sys­tems are brac­ing for an­other crush of deals, as a raft of bank guar­an­tees on bonds sold dur­ing the cri­sis ex­pire next year.

In­vestors rely on bank guar­an­tees, known as let­ters of credit, as in­sur­ance for tax-ex­empt bonds sold in daily, weekly or other short­term mar­kets, where in­vestors have the op­tion to abruptly de­mand re­pay­ment. Let­ters of credit give bor­row­ers ac­cess to bank cof­fers to buy out in­vestors in the bor­row­ers’ bonds, if nec­es­sary. But let­ters of credit typ­i­cally ex­pire af­ter one, three or five years—some­times longer—and must be re­newed.

De­mand for such pledges surged dur­ing the credit cri­sis af­ter a $330 bil­lion seg­ment of the short­term mar­ket col­lapsed in Fe­bru­ary 2008 and a flood of bor­row­ers con­verted debt to let­ter of credit-backed bonds.

Many health­care bor­row­ers face a crowded mar­ket for bank credit re­newals in 2011.

An anal­y­sis by the un­der­writer Cit­i­group shows de­mand is ex­pected to creep up­ward this year but spike sharply next year and re­main high in 2012 and 2013. Health­care bonds to­tal­ing $4.37 bil­lion must se­cure new bank credit agree­ments this year com­pared with $1.95 bil­lion last year and $14.4 bil­lion in 2011, Cit­i­group found in an anal­y­sis of Thom­son Reuters fig­ures.

Bor­row­ers face the risk banks or the econ­omy could stum­ble and squeeze credit ca­pac­ity next year, ac­cord­ing to health­care fi­nance ex­ec­u­tives. Un­der those con­di­tions, surg­ing de­mand could give banks lever­age to de­mand higher prices, ad­di­tional busi­ness or deny re­newals, as was the case dur­ing the credit mar­ket up­heaval.

Uni­ver­sity Hos­pi­tals in Cleve­land has al­ready be­gun talks to ex­tend one let­ter of credit set to ex­pire in 2011, said Bradley Bond, the sys­tem’s vice pres­i­dent of trea­sury.

The sys­tem, which owns seven Ohio hos­pi­tals and man­ages one more, did so in an ef­fort to get ahead of the wave of credit agree­ments that also end next year. “It’s al­most like get­ting in line at an amuse­ment park,” Bond said. “You just have to get in line and be in line.”

Health­care bor­row­ers with such short-lived bank credit agree­ments are fac­ing con­tin­ued un­cer­tainty over banks’ fi­nan­cial health and in­vestors’ tol­er­ance for bank dis­tress, he said.

In­vestor con­fi­dence in hospi­tal bonds fal­ters when banks strug­gle. “We are tied to banks more than one would think for a hospi­tal,” Bond said. “That’s the risk to­day with the bank­ing in­dus­try.”

Uni­ver­sity Hos­pi­tals re­fi­nanced an­other $50 mil­lion in Fe­bru­ary with a let­ter of credit from a shaky bank that was sched­uled to ex­pire next year. But last month’s move to re­fi­nance the $50 mil­lion was prompted by the de­sire to jet­ti­son

Mazurkiewicz: Wave of

Bond: “It’s al­most like get­ting in line at an amuse­ment park.”

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