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Panel: Short-Term Market Provides Options - and Challenges

DEC 12, 2012 4:34pm ET
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Issuers have more options available to them now in both the tax-exempt and taxable parts of the municipal market.

And there are more products to choose from, particularly those allowing borrowers to tap the short-end of the market while minimizing risk, such as through direct purchases.

But challenges await in 2013 for the short-term sector. Foremost among them are Basel III bank liquidity requirements and Dodd-Frank documentation and record-keeping responsibilities.

That was the message Wednesday from a panel at The Bond Buyer’s third annual 501(c)3 Conference on Healthcare, Higher Education and Cultural Institutions in New York City.

Basel III bank liquidity and regulatory requirements will affect the pricing and liquidity of the short-term market, said James Lansing, managing director, head of credit and debt capital markets, JPMorgan. As part of the Third Basel Accord, banks will be forced to maintain high amounts of cash or Treasuries to have adequate liquid capital on hand, and not otherwise tied up in variable-rate demand obligations.

“It will be an expensive proposition,” he said. “Bank balance sheets have been expanding dramatically.”

Over the past few years, the market has also witnessed more use of direct purchases by issuers, said Norman Coker, chief credit officer, education and nonprofits at U.S. Bank. Government attempts to resuscitate and then stimulate the economy helped expand their use. And it should pick up following the implementation of Basel III, he added.

Among synthetic and conventional vehicles, when comparing swaps with fixed-rate bonds, 501(c)3s have shown an inclination toward irregular synthetic structures, according to Gerri Magie, a vice president at Swap Financial Group. Many, for example, use swaps that are structured from fixed to floating rates, she said. This runs counter to the conventional structures that swap from floating to fixed rates.

Innovations to floating-rate structures — so that they no longer require liquidity support — have increased their popularity, Magie said.

One issuer, Dignity Health, the fifth largest healthcare system in the U.S. with $14 billion in assets, sees more options and products available to it in the public market for financing. The system has used the market to shift its overall strategy as well as expand its acute care network into 17 states.

Some of its primary financing goals, according to Jean Ham, the director of debt management for the system, included diversifying its products in the markets and spreading out the renewal risk on its short-term debt. Two avenues it explored involved using more direct purchases with banks and entering the public taxable market, Ham said. “We’ve diversified our product mix and our bank mix.” Both approaches worked, she added. Issuing taxable debt, for example, gets one to market more rapidly, instead of issuing state-by-state. This is important when considering that Dignity Health is in 17 states, Ham said.

“We’ll do more in the taxable market in the future,” she said. “It provides a lot of flexibility.”

Dignity Health also plans to look for more sources of capital and participate in more joint ventures. It also has variable-rate debt backed by letters of credit with a three-year roll. But it is working with its banks to spread out its renewal risk on them.

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