Hospitals hungry for return of incentives for borrowing
Build America Bonds, the temporary financing option that helped lower debt costs for healthcare borrowers before it expired in December, enjoy the endorsement of the president, who would revive the bonds if he could. But hospitals are moving to resurrect other nowdefunct credit programs.
President Barack Obama, in his budget released mid-February, called for the popular Build America Bond program to be reinstated, with a few changes. The American Hospital Association and the National Association of Health and Educational Facilities Finance Authorities—which bring hospital bonds to market—will seek to restore bank incentives to buy tax-exempt bonds and allow hospitals to enter markets with the strong credit support of the Federal Home Loan Banks system, officials said.
Congress enacted the short-lived programs to boost credit access as the housing meltdown claimed banks and insurers that will be addressed, if at all,” he said in an e-mail. The first, commonly described as the bankqualified provision, expanded certain tax deductions for banks that buy tax-exempt bonds. Banks could deduct some interest expense for up to $30 million of bank-qualified bonds per borrower under the American Recovery and Reinvestment Act. Previously, the limit was $10 million per bond issuing authority—such as cities, counties or state agencies that bring bonds to market for multiple borrowers. Bank-qualified deals totaled $36.7 billion in 2010, up from $15.2 billion in 2008, according to Thomson Reuters.
Another provision allowed tax-exempt bonds to total up to 2% of bank assets, giving banks further incentive to lend to not-forprofit borrowers.
Michael Tym, a director with Ponder & Co., said the deductions improved credit access for small hospital borrowers. Banks continue to lend to hospitals, but not to the same degree or as cheaply as before, he said. system. Slightly more than half the bonds totaled $10 million or less. Hospitals and other healthcare borrowers lagged behind other sectors that took advantage of the temporary access to credit support, accounting for 31 of the 187 bond deals with Federal Home Loan Banks guarantees under the provision. In total, the Federal Home Loan Banks system extended its credit to roughly $4.6 billion in debt.
But it wasn’t only small borrowers that took advantage of the credit relief.
David Singleton, senior vice president, treasurer and chief investment officer for Adventist Health System, said the system relied on the programs to weather upheaval from the credit crisis and improve borrowing costs.
The Winter Park, Fla.-based system used backing from the Federal Home Loan Bank of Atlanta after interest rates climbed on $740 million in short-term debt backed by a slipping commercial bank, Singleton said. “It’s absolutely an expense you feel,” he said. The Atlanta Home Loan Bank support helped lower rates until Adventist could refinance.
Adventist also took advantage of the provision that allows banks to hold 2% of its assets in tax-exempt bonds to refinance $357 million with a direct bank loan. The deal refinanced debt from a three-hospital system Adventist acquired in September and significantly reduced the interest rates, thanks to the provision and because Adventist agreed to pay off the 20-year bonds in 10 years or less.
Singleton said a recent sharp rise in rates underscores the need for such programs to be continued. “I don’t believe the crisis is over,” he said.
The end of Build America Bonds is one culprit behind the recent rise in tax-exempt interest rates, according to analysts and healthcare finance experts (Feb. 14, p. 12). Obama endorsed expanding the bond option to include private not-for-profits, including hospitals. Under the Recovery Act, governments—states, cities, counties—could issue the taxable bonds and receive a federal subsidy covering 35% of the taxable borrowing costs. The president’s budget proposed reducing the subsidy to 25%. A bill introduced in early February would extend Build America Bonds for two years with incrementally smaller subsidies of 32% this year and 31% in 2012.
But the bonds’ revival could meet with powerful opposition. Dave Camp (R-Mich.), chairman of the House Ways and Means Committee, has been sharply critical of the bonds, saying they “simply subsidized state and local governments going deeper into debt.”