Bond market affects hospital
By Phyllis Moore
Published in News on March 19, 2008 1:45 PM
Wayne Memorial Hospital has been forced to consider alternatives to reduce interest costs on its 2006 bond issue for $35 million.
A sharp drop in the auction rate bond market has impacted Wayne Memorial and nine other hospitals, including Pitt Memorial, Cape Fear and Cleveland Regional.
Rebecca Craig, vice president of finance at Wayne Memorial, explained the situation to the board of directors Tuesday morning.
"The bond market is in disarray," she said.
Since Feb. 19, four weekly auctions of WMH bonds have failed, she said. A temporary reprieve might have come in the form of a letter issued late Friday by the Securities and Exchange Commission, allowing tax-exempt issuers of failed auction rate securities to bid on their own bonds, with certain disclosures.
At present, the hospital has its $35 million bonds insured through AMBAC, which has a AAA rating. AMBAC has been one of the biggest casualties of the turmoil, its reputation currently in jeopardy.
Board member Harold Brashear, who chairs the finance committee, said the SEC's allowing WMH to buy its own bonds without penalty "gives us some more time to let the markets shake out."
Mrs. Craig agreed with taking a wait-and-see approach.
"Auction rate securities are probably dead and in six months (there) will be no more auction rates. We are going to probably have to, if you all agree, give those bond holders notice, withdraw the notice of redemption," she said, advising the board to be patient.
"It's premature until we have more information," she said.
Three possible options were offered for consideration:
* Short term line of credit from a bank, sufficient to redeem the bonds and refinance the line of credit
* Redeem bonds and issue fixed-rate securities
* Redeem bonds and issue variable rate demand bonds
Several banks have been interviewed, with BB&T presenting the best proposal, Mrs. Craig said. With a 30-year bond to pay off, its offer of a three-year and five-year commitment of credit seemed best, she said.
Board member Ray McDon-ald Jr. asked what other hospitals are doing in light of the recent shifts, and how the hospital could guard against risk. Some are choosing the fixed rate, Mrs. Craig replied.
Ideally, to ensure the wisest investment and return, she said the best scenario would be for the hospital to generate a profitable year.
"I would like to have nine good months of earnings," she said. "If we can have a good year this year, and we had an excellent February -- we had record admissions and record ED visits, our self-pay wasn't that bad. Surgeries were up in February, it was just a good overall month."
Board member Dr. Joseph McLamb was philosophical about the situation.
"I don't think anybody could have predicted these changes in the market," he said.
"We're in good company," replied Mrs. Craig, referring to the other hospitals also affected.
She suggested the board study what those in the same position are doing and keep watch on what transpires in the market.
A decision could be made by the board's executive committee, which is authorized to convene between regular meetings, in the next few weeks, said Sam Hunter, board chairman.