WASHINGTON — The National Federation of Municipal Analysts has updated its disclosure best-practices paper for issuers of hospital debt in response to market changes spurred by the financial crisis.
“Recommended Best Practices in Disclosure for Hospital Debt Transactions,” released Thursday, calls on hospital issuers to make more frequent disclosures, and to disclose a host of details related to swaps, variable-rate securities, regional market risks and other events that could impact a hospital’s finances.
The guide, which is available on the NFMA’s website, was created by a committee of roughly 20 analysts, financial advisors, rating agency executives and hospital representatives. It updates a disclosure guide for hospital debt that the group released in 2000.
During the last decade, hospital financing has become more complex, with many hospitals issuing variable-rate securities and tying those securities to interest-rate swaps, Steve Whalen, senior investment officer at Liberty Mutual Group Asset Management, Inc., and chair of the NFMA’s hospital best-practices subcommittee, said in a conference call with reporters.
Hospitals also have issued more self-liquidity debt, which is backed by the hospital’s credit, not bank agreements or bond insurers. In addition, many hospitals have invested in “non-traditional assets” like hedge funds, the liquidity of which can be difficult to assess, said Whalen.
When the financial crisis hit in 2007, bank credit dried up and bond insurers folded, leaving hospitals as the primary providers of the underlying credit for bonds. Many were forced to issue more debt to unwind swap positions.
“Folks who thought they had highly-rated, safe and secure bonds suddenly found themselves with much lower-rated securities, [and there was] not much information in the market about the underlying credit,” Whalen said. “Given this volatility, an annual disclosure [filed] four to five months after the fiscal year was deemed to be insufficient.”
The paper says hospital credits are as volatile as corporate credits, and that hospitals should therefore make disclosures at least as often as corporate borrowers.
In addition to making annual financial and operating disclosures, the paper recommends hospitals make quarterly disclosures of unaudited financial statements, debt instruments and swap positions.
It also recommends ongoing disclosure of variable-rate debt information such as maturity dates, amortization information, renewal terms, termination events and relevant covenants. Hospitals should provide details about their investments, such as how much money they have in invested in hedge funds, real estate and private equity funds.
NFMA recommends hospitals make annual and quarterly disclosures of swap transactions. Quarterly reports should include counterparty names, swap advisors, trade type, bond series, notional amounts, mark-to-market value and other details.
Hospitals should be able to provide the information requested in the paper without much additional work, Whalen said.
“We tried very hard to limit our request to information that is either tracked internally, or information [that is] normally ... provided to banks and credit institutions,” he said.
NFMA recommends that the disclosures include a written narrative describing notable changes to the budget or the business since the last filing.
“Management should provide meaningful insight regarding the underlying factors that gave rise to such differences and changes, rather than simply reciting the numerical comparisons presented in the statements,” the NFMA said in its paper.
Jeff Schaub, managing director at Fitch Ratings and a member of the NFMA subcommittee, said the narrative should describe notable events that affect the business, even if those events are not the “material” type that would need to be disclosed under the Securities and Exchange Commission’s Rule 15c2-12 on disclosure.
“Anything that is significant, [but] that may not have made it to the numbers yet” would be valuable to investors, he said.
Such events could include union activities, litigation and changes to the local competitive market. Investors would also want to know if the hospital loses a major contract with a third-party, like a health maintenance organization.
