Hospitals across the US are experiencing the downside of depending on auction-rate securities to raise capital at a low rate. With the collapse of the auction-rate securities market, the interest rates that hospitals had to pay for capital increased from 2-3% to 9-15%.
While many hospitals tried to obtain letters of credit to refinance their debt, costs for these letters of credit also increased-even doubling in many instances-and fixed-rate loan expenses also grew. In the meantime, credit rating agencies downgraded bond insurers and banks.
One area in which hospitals may have to make cuts to help them get through the financial squeeze is in the areas of expansion and new construction. Investment income has suffered because of the market’s collapse, and many hospitals have had to decrease their bottom line.
While certain publicly traded hospitals systems, such as Universal Health Services and Tenet Healthcare, are able to access equity markets when they need to raise funds, this source of money has also been severely hampered by problems affecting the stock market.
This is the ‘flip side’ of the auction-rate securities debacle: Many issuers were persuaded to issue auction-rate securities and are now forced to pay higher rates on these securities than they would be paying if traditional bonds had instead been issued. If these issuers now attempt to refinance this debt they must do so at a rate much higher than when the auction-rate securities were issued. Furthermore, many of these issuers, including hospitals and municipalities, are being forced to pay Wall Street firms repeatedly for auctions they know will fail. Our law firm is currently reviewing the legal position of such issuers.
Related Web Resources:
Credit Crunch Begins To Squeeze Hospital Industry, Investors.com, July 25, 2008
Hospital bonds are latest credit casualty, JSOnline.com, March 1, 2008
Auction Rate Securities: What Happens When Auctions Fail, FINRA.org, April 30, 2008
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