Panelists Look to Post-Crisis Era For Nonprofit Health Care Finance

LAS VEGAS - What is clear: the landscape for nonprofit health care financing has changed. What is not so clear: what that landscape will look like after the current credit crisis wanes, according to participants last week at The Bond Buyer's Nonprofit Hospital Finance Conference here.

"There are a number of assumptions we simply cannot make any more about the market," said Mark Pascaris, a Moody's Investors Service analyst, summarizing a year that has included the collapse of the auction-rate securities market and, most recently, an almost complete seize-up of the markets.

"There's no liquidity in the market today. Large blocks are hard to move," said Robin Fisher, vice president at Franklin Templeton Investments.

The collapse of the auction-rate market, and the recent crunch that has resulted in many variable-rate demand bonds getting put back to liquidity providers, have highlighted the importance of how deals are structured, said Hamilton Chang, managing director at Oppenheimer & Co.

"That's our lesson from the last 10 to 12 months or so," he said. "When people started doing document dives, they were relatively surprised to find some things."

Robert Olson, partner at Squire, Sanders & Dempsey LLP, suggested that it might be instructive for issuers to go back and re-read financing proposals they received a year ago.

"Read the description of the risks that were included in that proposal and ask yourself, did that discussion fairly cover what's occurred in the last year, and the last two months, or the last two weeks?" he said. "If it didn't, I'm not suggesting the authors of that were being disingenuous; maybe they just weren't that good at seeing how the future would unfold."

One way the near future is likely to unfold for many issuers involves a flight to simplicity, according to C. Richard Bayman, a senior vice president at Shattuck Hammond Partners.

"Clearly what we're hearing from a lot of our clients is a movement away from short-term debt, clearly more bias toward issuing traditional fixed rate," he said.

Many issuers who do want variable-rate exposure are likely to get it by issuing fixed-rate bonds and using interest rate swaps to obtain a synthetic variable rate.

"It reduces the risk to the issuer down to counterparty risk and mark-to-market risk," Bayman said. "You fundamentally put away your cost of capital at whatever your fixed rate is."

Leigh Nader, vice president at Assured Guaranty, said her company has heard the concerns of many issuers who have been forced by the crises in the variable-rate markets to terminate bonds for which they had paid 30-year premiums upfront.

The response, she said, is likely to be a change in the way bond insurance premiums are priced for variable-rate bonds.

"Like a letter of credit, there'd be some portion of that premium that would be payable upfront, and it would be annual thereafter," she said.

"We're responding to the needs of the market, and we're trying to be flexible given everything that's gone on recently," Nader said, adding that the firm expects to offer that new pricing structure to the market in the "very near term."

Assured Guaranty director John Wells said that the company remains active and relevant in the market, despite Moody's decision to place its Aaa rating on review for a possible downgrade.

Big changes are in store with the imminent upward ratings migration that Moody's will implement in the coming months for government issuers, with Standard & Poor's and Fitch Ratings following similar paths.

That is expected to reduce demand for bond insurance from government issuers, Wells said, while adding that Assured expects continued demand from enterprise sectors, like health care, transportation, higher education, and energy.

"We believe we still provide value in these sectors and this is where we expect to continue to see business," he said.

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