CHICAGO - Unable to access the frozen credit market to refund $60 million of bonds that were about to convert to auction-rate mode, a Kalamazoo, Mich.-based hospital last week turned to its parent company to purchase $40 million of the debt and used an emergency bridge loan to buy the remaining $20 million.
The decision by Bronson Healthcare Group, parent of Bronson Methodist Hospital, to purchase the debt could take an 18% bite out of BHG's total operating cash - illustrating how the current market turmoil is hurting some nonprofit health care providers.
BHG's decision to purchase the bonds came after Bronson Methodist Hospital delayed a planned $74 million refunding transaction scheduled for mid-September. Proceeds were to be used to refinance $59.5 million of variable-rate hospital revenue bonds issued in 2005 that were scheduled to convert to auction-rate mode on Oct. 15.
The hospital also planned to restructure another $14.7 million of insured variable-rate debt. All the debt was to be restructured to a fixed-rate mode.
"We were ready to print the preliminary official statement and go ahead [with the sale], when voila - the credit markets froze," said John Hanley, managing director at Ziegler Capital Markets, underwriter for Bronson Methodist.
As the credit freeze persisted, the A2-rated hospital continued to postpone the sale. With the Oct. 15 deadline for the auction-rate conversion looming, the finance team turned to its parent company, Bronson Healthcare Group, whose revenues are dominated by Bronson Methodist, to step in to purchase the bonds.
BGH dipped into its operating cash to purchase $40 million worth of the bonds and borrowed another $20 million from JPMorgan Chase. The hospital will pay an interest rate based on the seven-day London Interbank Offered Rate plus 100 basis points for the life of the six-month bridge loan, said Mary Meitz, chief finance officer of Bronson Methodist.
With the immediate crisis over, Bronson, like issuers across the country, is watching the market closely to determine an opportune time to move forward.
"Now we're going to come back to the market when liquidity has been restored and we can achieve a favorable cost of capital," Hanley said. The finance team is also outlining "multiple options" for the debt if the hospital is unable to enter the market over the next several months, he added.
Despite the recent turmoil, Meitz said the hospital is faring relatively well in the current market. "There's a lot of hospitals paying double-digit interest rates [on their debt], and ours are still in the single digits," she said. "Our total financial picture is very good, so I'm feeling very fortunate."
Of Bronson Methodist's $259 million of outstanding debt, about $184 million is in a fixed-rate mode. Earlier this year the hospital refinanced roughly $92 million of auction-rate debt to fixed-rate debt. Meanwhile, the hospital is considering restructuring a $75 million piece of variable-rate debt issued in 2006 and insured by Financial Security Assurance Inc. to fixed-rate bonds, Meitz said.