The Massachusetts Health and Educational Facilities Authority within the next two weeks will convert $150 million of auction-rate Partners HealthCare System debt into variable-rate mode backed by the health care provider's own liquidity.
The auction-rate securities comprise Series 2003D-1 for $71 million and Series 2003D-2 for $79 million. The interest rates on both series reset every 35 days. Series 2003D-1 will convert on March 12 to a daily variable-rate mode, while Series 2003D-2's interest rate will fluctuate on a weekly basis beginning March 5, according to Debra Sloan, director of capital markets at Partners.
Fitch Ratings and Moody's Investors Service rate the new variable-rate demand bonds F1-plus and VMIG 1, respectively. Standard & Poor's rates the transaction AA and A-1-plus.
The auction-rate securities are not insured. In addition, Partners chose not to request a letter of credit for the VRDBs and will secure the sale with its own cash flow as the health care provider has roughly $4.1 billion of unrestricted cash and investments equalling 246 days cash on hand, according to a Fitch press release.
Series D-1 and D-2 have never failed at auction, yet rates on the debt have gone up. D-1 and D-2 currently have interest rates of 5% and 5.72%, respectively. That's a slight increase from an average rate of 3.74% for the D-1 securities and an average 3.79% rate for the D-2 securities during fiscal 2007, which ended Sept. 30.
Sloan said converting the debt will shift the securities into a different investor base of retail buyers from its current auction-rate buyer base that includes primarily corporate investors.
"We had started to observe a drift in rates last fall and grew concerned about the ongoing support of the buyer base," Sloan said. "Thirty-five-day auctions are targeted to a different buyer base than weekly auctions."
This increase has brought on additional costs for Partners of more than approximately $200,000 per auction period of 35 days based on current rates compared to prior fiscal year averages.
"We've seen an increase of 150 basis points from our prior fiscal year average to the current auction level and that equates to a little over $200,000, about $215,000, on a 35-day period," Sloan said.
Attached to the D-1 and D-2 securities are Libor swap agreements with a counterparty paying a floating rate in exchange for a fixed-rate payment from Partners. Sloan declined to disclose the counterparty or counterparties on the swap transactions, the percentage of Libor, or the fixed-rate amount that Partners' pays.
Out of $2.1 billion of total outstanding debt, the health care provider has roughly $600 million of auction-rate securities, which includes Series D-1 and D-2. Officials are evaluating refinancing its remaining auction-rate securities into fixed-rate debt or converting them into variable-rate mode as well. Other Partners' auction-rate debt outstanding includes the recent Series 2007 G1-4 bonds which reset every week. Those securities total $300 million and are a part of Partners' overall $800 million deal that priced in June and won The Bond Buyer's Northeast Large Issuer Deal of the Year award for 2007.
As of Feb. 26, Series G1 carries an interest rate of 7.45% and Series G2 carries an interest rate of 6%, as of Feb. 28. On Feb. 22, Series G3 reset at 8% and Series G4 reset at 5.95% on Feb. 25.
Standard & Poor's and Fitch rate Partners' $2.1 billion of long-term debt AA. Moody's assigns the credit its Aa2 rating.
