POINT­ING THE FIN­GER

The dis­pute could de­ter­mine who is to blame for in­creased debt load when mar­ket con­di­tions head south

Modern Healthcare - - Front Page - Melanie Evans

Tri-City Med­i­cal Cen­ter ex­ited the auc­tion-rate bond mar­ket ear­lier this year, fol­low­ing many not-for-profit hos­pi­tals that fled the mar­ket af­ter its 2008 col­lapse. But un­like other hos­pi­tals, Tri-City Med­i­cal Cen­ter has sued its bank and bond in­surer over the nowl­argely de­funct fi­nanc­ing ve­hi­cle.

The district-owned hos­pi­tal in Ocean­side, Calif., last month filed a law­suit in the Su­pe­rior Court of Orange County against Cit­i­group and MBIA, al­leg­ing the bank and in­surer misled the hos­pi­tal di­rec­tors with claims the auc­tion-rate mar­ket bore low risk and were neg­li­gent in fail­ing to dis­close bank in­ter­ven­tion in the mar­ket, in­clud­ing bids to pre­vent failed auc­tions.

The law­suit ap­pears to be one of the first brought by a health­care bond is­suer against banks that mar­keted auc­tion-rate bonds be­fore the mar­ket seized in Fe­bru­ary 2008 amid in­vestor panic and mount­ing bank dis­tress. It has not re­turned.

Alex Sa­muel­son, a Cit­i­group spokesman, de­clined to com­ment on the law­suit. MBIA spokesman Kevin Brown de­clined to com­ment on the lit­i­ga­tion.

Tri-City’s le­gal ar­gu­ment boils down to this: No one ad­vised the hos­pi­tal of the risks, de­spite an obli­ga­tion to do so.

The law­suit al­leges Cit­i­group wrongly claimed auc­tion mar­kets were open and fair and the bonds were rel­a­tively low risk, but failed to ad­e­quately dis­close ac­tiv­ity to sup­port and ma­nip­u­late mar­kets that was the sub­ject of an in­quiry by the Se­cu­ri­ties and Ex­change Com­mis­sion in 2006. The SEC fined 15 banks $13 mil­lion in May 2006 for fail­ing to dis­close in­ter­ven­tion in the auc­tion mar­ket, in­clud­ing Cit­i­group. The banks nei­ther ad­mit­ted nor de­nied the claims, but were also or­dered to gen­er­ally dis­close po­ten­tial mar­ket ac­tiv­ity.

By 2006 “the en­tire auc­tion-rate se­cu­ri­ties mar­ket was not a free-mar­ket op­er­a­tion match­ing will­ing in­vestors with will­ing is­suers, but in­stead was an en­gi­neered, ar­ti­fi­cial mar­ket sup- ported by the ac­tiv­i­ties of the in­vest­ment bankers de­signed to post­pone a col­lapse, and such sup­port could not con­tinue in­def­i­nitely,” the law­suit said.

In July 2007, eight months be­fore the nation’s emerg­ing credit cri­sis par­a­lyzed the $330 bil­lion auc­tion mar­ket, the hos­pi­tal went to mar­ket to re­fi­nance roughly $68 mil­lion of long-term debt to auc­tion-rate bonds.

At the time Tri-City moved its debt to the auc­tion mar­ket, the hos­pi­tal’s seven-mem­ber board, elected by the district, was nearly all med­i­cal or health­care pro­fes­sion­als, in­clud­ing a re­tired reg­is­tered nurse and a re­tired phar­ma­cist. The one mem­ber not work­ing in health­care was a cer­ti­fied pub­lic ac­coun­tant.

The hos­pi­tal paid roughly $3.2 mil­lion— go­ing to un­der­writ­ers for the in­surance pre­mium; fees for attorneys, trustees and rat­ings agen­cies; and mis­cel­la­neous costs to re­fi­nance the debt, bond doc­u­ments show.

Neg­li­gence al­leged

The law­suit also names the hos­pi­tal’s attorneys and fi­nan­cial ad­vis­ers and al­leges they were neg­li­gent in fail­ing to alert the di­rec­tors that the 2007 bond deal could vi­o­late Cal­i­for­nia law that sets a limit on in­ter­est paid for hos­pi­tal district debt.

Soar­ing in­ter­est on the bonds ex­ceeded the 12% limit for auc­tion-rate se­cu­ri­ties is­sued by hos­pi­tal dis­tricts, the law­suit said. In­ter­est in TriC­ity’s auc­tion bonds climbed above the state limit in mul­ti­ple auc­tions be­tween Novem­ber 2008 and De­cem­ber 2009, re­peat­edly reach­ing 14.5%, ac­cord­ing to the com­plaint.

The in­ter­est rate hikes cost Tri-City Med­i­cal Cen­ter $15 mil­lion be­yond what it would have paid had debt not been re­fi­nanced.

Larry An­der­son, CEO of the 330-bed hos­pi­tal, who dubbed the bonds “heinous,” said the hos­pi­tal also paid roughly $6 mil­lion when it ter­mi­nated its hedge against in­ter­est rates on the debt, known as a swap, two months af­ter his ar­rival in Jan­uary 2009. An­der­son said the

An­der­son called the bonds “heinous.”

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