Massachusetts Health and Educational Facilities Authority borrowers in need of converting auction-rate bonds into variable- or fixed-rate modes now have faster access to the market, as the agency last week implemented new approval policies and authorized refinancing of nearly $600 million of auction-rate debt.
The policy change is in response to recent auction-rate failures where issuers are forced to pay higher interest rates as investors have shied away in the past three weeks from buying auction-rate securities and broker-dealers do not have enough liquidity to buy the securities. Historically, when the supply of auction-rate securities outweighs demand, bankers would purchase the unsold debt.
MassHEFA has $3.16 billion of auction-rate bonds outstanding, which is 46% of the authority's total $6.88 billion of variable-rate debt, according to spokesman Liam Sullivan. While auctions of MassHEFA auction-rate bonds have failed in the past few weeks, the authority was unable to pull together by press time an estimated amount of bonds comprised in failed auctions or specific details of bonds which did not sell.
"The breakdown in the auction rate market is of utmost concern for us at [MassHEFA]," said executive director Benson T. Caswell in a prepared statement. "The rise in rates over the last week has greatly affected our nonprofit borrowers with auction-rate exposure."
The authority holds the most auction-rate debt of any agency in the state. The Massachusetts Educational Financing Authority has $1.32 billion of auction-rate debt, followed by the Massachusetts Development Finance Agency with $660.9 million, according to Thomson Financial data.
Allowing auction-rate conversions and refinancings to pass through MassHEFA's approval process more quickly will enable clients to address the auction-rate market in a timely matter.
"We made some policy changes in an effort to be proactive about streamlining our operations in terms of a lot of borrowers who are in that auction-rate dilemma, and in thinking about what their options are, we sort of streamlined our operations to accommodate refinancings," Sullivan said.
The policy changes include allowing borrowers to change modes on multi-model bonds with staff approval only and not board approval. Previously, a change in security modes required board authorization. In addition, any bond deals that are solely refundings and do not include new-money can receive final approval from the board on the same day that the refunding transaction was introduced to the panel, making it a one-step process. In the past, all bond sales, including refundings, required an initial and a final approval, during two separate board meetings.
Along with the policy changes, the board approved a combined $600 million of refunding to allow borrowers to refund auction-rate debt for variable or fixed rate bonds. In March or April, CareGroup Healthcare System may refund up to $340.8 million of auction-rate debt into variable- or fixed-rate mode. Those series include 1998 Series B bonds for $75 million, 2004 Series C1 and C2 for $138 million and 2004 Series D bonds for $49 million. The Series B and D bonds are insured by MBIA Insurance Corp. and the Series C bonds are insured by Ambac Assurance Corp.
Other auction-rate securities within the CareGroup deal include Beth Israel Hospital 1992 Series G and 1996 Series H for $61.7 million and $13.2 million, respectively, and $3.8 million of New England Deaconess 1989 Series F bonds. MBIA insures the Beth Israel Series G bonds and the Series F bonds and Ambac insures the Beth Israel Series H bonds.
Citi will underwrite the deal, which includes $562 million of refunding - $340.8 million for auction-rate conversion and another possible $221 million to refund a fixed-rate 1998 Series A, depending on market conditions. The transaction will also include $130 million of new money. Public Financial Management Inc. is the financial adviser and bond counsel is Edwards, Angell, Palmer, & Dodge LLP.
The CareGroup system includes four hospitals in eastern Massachusetts that have a combined bed total of 1,044.
In addition to CareGroup, Tufts University and Stonehill College will refund up to $180 million and $75 million, respectively to refinance auction-rate debt into variable or fixed-rate bonds. Neither school has had a failed auction, Sullivan said.
