Orlando Health System Demonstrates Effects of Radian Asset Downgrade

If the Orlando Regional Healthcare System Inc.’s situation is any indication, even issuers have begun feeling the ripple effects of bond insurer Radian Asset Assurance Inc.’s recent credit rating downgrade. Investors have been asking the central Florida hospital system if it was prepared to handle sharp increases in the reset rates for its Radian-backed auction-rates bonds, according to disclosure documents filed yesterday through Digital Assurance Certification.In the filing, Orlando Regional said it was answering questions from investors about reset levels on its $50 million of Series 1999A bonds and its $35.7 million of Series 1999B bonds — both of which were sold as 35-day auction-rate securities through the Orange County Health Facilities Authority.They were originally insured by Asset Guaranty. Radian Group Inc., parent of Radian Asset Assurance, bought Asset Guaranty in 2001.Fitch Ratings last week dropped its rating on the parent company to A-minus from A on news that its planned merger with mortgage insurer MGIC Investment Corp. had fallen through. The Radian bond insurer’s rating fell to A-plus from AA.The value of Radian’s insurance in the municipal bond market had been falling for several weeks leading up to the failed merger and the resulting downgrade.In late July, Radian-backed municipal bonds tended to yield 55 to 60 basis points more than standard, high-grade municipal yield curves — already up from their previous range of 40 to 45, according to Standard & Poor’s Securities Evaluations. By last week, Radian-backed bonds tended to yield 100 to 110 basis points more than high-grade munis.Radian officials declined to comment.Investors have asked Orlando Regional if markedly higher reset levels on its Radian-backed auction-rate securities were impacting financial performance, according to the filing. They have also asked if Orlando Regional had swaps in place to protect against an increase in floating rate interest costs and if the health system had plans to use the fixed-rate mode for its auction-rate securities.“We have seen markedly higher reset rates on the 1999A and 1999B bonds (approximately $85 million outstanding) which are insured by Radian,” Orlando Regional said in the filing. “We have a cost of funds swap in place so we have not had any financial impact. The swap can be converted to a percent of Libor swap if Radian is downgraded below AA-minus. We are exploring our options to bring the reset rates back to normal ranges if a downgrade occurs.”Paul Goldstein, Orlando Regional’s chief financial officer, could not be reached for further comment. The hospital system is not alone in its dilemma. Since the beginning of 2000, Radian has insured 45 auction-rate deals worth a combined $1.7 billion, according to Thomson Financial.Rating analysts covering the muni market’s structured-type products said they have gotten calls from people considering extra credit enhancement for their Radian-backed bonds.Some callers have asked how the rating agencies would assess an insured bond if had a higher-rated letter of credit added to it, said Standard & Poor’s director Jeff Previdi.Previdi said that he has not yet seen anyone double-up their credit enhancement this way, but that he has nonetheless had to develop a response for such questions. “If properly structured — if the mechanics work correctly — and if you have a letter-of-credit bank whose rating is higher than Radian’s, then you would get that higher rating,” he said.