Escaping from high interest payments on variable-rate bonds may prove costly for many schools and hospitals.
The parent of Beth Israel Deaconess Medical Center in Boston, for instance, could pay more than $15 million in termination costs and professional fees to refinance bonds worth $562 million, mostly with variable rates, according to state records.
Beth Israel's debt refinancing is one of three proposals approved by a state financing agency Thursday to help institutions get out of variable-rate interest payments that are spiking higher because of fears about the bond market's links to subprime mortgage problems.
CareGroup Inc., parent of Beth Israel, is paying an extra $125,000 a week in interest payments after rates on some of its debt shot up to around 10 percent this week, from 5 percent the week before. CareGroup chief financial officer John Szum said he is studying whether to refinance the institution's debt at a lower rate - technically known as "refunding" the securities. CareGroup would have to pay $15 million in fees to Bank of America Corp. and Citigroup Inc. in some refinance scenarios. It also would pay $8 million to lawyers and underwriters, though some of that money would cover the cost of additional borrowing.
"I'd fully expect that other institutions will be facing these kinds of costs," Szum said.
In addition to CareGroup, the Massachusetts Health and Educational Facilities Authority also approved new borrowing proposals by Tufts University and Stonehill College, both of which are paying sharply higher interest on variable-rate loans. The authority also approved rules to speed the process of refinancing for schools and hospitals.
The institutions are among more than a dozen in Massachusetts in recent years that borrowed money at variable rates to lower costs, and purchased bond insurance to make their debt more attractive to investors. The bond insurers have come under scrutiny recently for the subprime mortgages they held in their portfolios, leading to downgrades from ratings agencies and problems for their clients.
The type of variable-rate bonds sold by CareGroup, for example, are sold at auction and have interest rates determined by bidding that occurs every seven, 28, or 35 days. When there aren't enough buyers, the auction fails and bondholders who wanted to sell are left holding the securities, though they may receive higher interest payments on those bonds. Rates at failed auctions are set at a level spelled out in statements issued at the initial bond sale. An estimated 80 percent of the auctions held Wednesday failed.
Contacted this week by the Globe, many borrowers said they were considering refinancing or restructuring their debt to lower their payments.
But the CareGroup example shows how terminating borrowing arrangements can prove costly, like the high fees homeowners can face to refinance a mortgage. At Worcester Polytechnic Institute, interest payments lately have risen by $15,000 a week on $54 million in auction-rate securities the school issued mostly to build its Gateway Park life sciences center.
WPI's executive vice president, Jeffrey Solomon, said he would prefer to convert the debt to a different type of variable-rate bond and has a letter of credit from TD Banknorth he would need to do so. But the school's bond insurers, including XL Capital Assurance, haven't given the necessary approvals, leaving him with the more expensive option of issuing new bonds. He's heard of similar cases elsewhere. New bonds, he said, mean "more time and money."
An XL spokesman, Michael Gormley, said he couldn't discuss the case of an individual borrower. "We understand the difficulties borrowers are facing due to the current market conditions, and are working with our clients to develop solutions to assist them."
Ross Kerber can be reached at kerber@globe.com.
