Nonprofit Health Care Providers Face "Stark Choice" on Swaps

CHICAGO — Nonprofit health care providers grappling with what to do about interest rate swaps that for years saved them money but now have become costly burdens face a “stark choice” that can depend on their fiscal position and appetite for risk. 

So says a new report from Ziegler Capital Markets Group that discusses how and when providers should consider unwinding swaps that have turned against them.

The cost of terminating floating-to-fixed rate swaps has risen as interest rates have fallen since 2008 when the economy slumped. Fees that banks charge to end a swap before its termination date have also gone up.

But swaps often pose a big risk for health care providers, who are struggling with other fiscal and economic challenges that have cramped liquidity.

Noting the challenges involving swaps many providers now face, health care credit analysts have warned of heightened scrutiny of an issuer’s swaps as part of overall debt portfolio risk.

Providers with troubled swaps often face a choice of making a costly, but known, termination payment today or “continue to be subject to periodic and uncertain cash payments for the foreseeable future,” said Brett Whysel, a managing director of health-care finance with Ziegler, who wrote the recent article outlining how and when to unwind swaps.

They also face the risk that the swap’s value will continue to plummet, requiring a higher termination cost in the future,

“That’s a risk some folks are no longer comfortable with,” Whysel said. “In some cases the provider isn’t well-positioned to take the risk that the value gets worse.”

“The payment to unwind the swap is just the present value of the projected payments you’re going to be making in the future,” he added. “You can pay a million dollars today to unwind the swap or you can pay it over the next 20 years. The reason to unwind it is that the million dollars could very easily become two, or 10.”

Providers considering unwinding costly swaps can consider a number of strategies, Whysel wrote in “Collateral Conundrum: Rational Strategies for Unwinding Swaps.”

Among them: unwinding the swap in equal portions over a period of time, deciding on a “reasonable” value at which to unwind, applying the swap to other variable-rate debt, or replacing a floating-to-fixed rate swap with fixed-rate bonds and a basis swap. 

“In all cases the finance staff and the board need to be sophisticated and fully informed and understand and evaluate the risks [of unwinding swaps] as being more than compensated by the benefits,” Whysel said.

Despite all the problems, interest-rate swaps do sometimes have a place in the current market, he said.

For example, highly rated credits with lots of liquidity and the ability to handle portfolio risk can benefit from a floating-to-fixed rate swap that would likely lower borrowing costs. And in some cases providers can benefit from synthetic floating-rate debt if they want more variable-rate debt in their portfolio but for some reason are unable to sell traditional variable-rate demand bonds.

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Healthcare industry
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