Faced with soaring debt costs, hospitals and their allies in Congress are seeking some unusual relief: permission to bid on their own bonds.
The notion is to allow hospitals, universities, nonprofits, and government agencies a way to sidestep interest rates driven up by the global credit crunch by participating in auctions that set rates on their own securities.
After working smoothly for years, these auctions have seized up in recent weeks and created millions of dollars of extra borrowing costs at some of the state's largest institutions including Brandeis and Tufts universities, hospitals like the parent of Beth Israel Deaconess Medical Center in Boston, and agencies like the Massachusetts Water Resources Authority.
The immediate reason is that many buyers have stopped bidding in the auctions, spooked by subprime lending issues and other economic woes. When no bids are made, many bonds reset at interest rates as high as 20 percent in some cases. Seeking a way out, Senator Charles E. Schumer, a New York Democrat, yesterday asked the Securities and Exchange Commission to allow institutions to bid on their own securities in such situations without raising concerns they are manipulating markets. Such bids would allow the institutions to avoid the highest rates that kick in when auctions fail, without the expense of retiring or refinancing the entire borrowing.
Representative Barney Frank, a Newton Democrat and the chairman of the House Financial Services Committee, proposed a similar idea last week. So did Anne Phillips Ogilby, a Ropes & Gray attorney representing 14 hospitals, in a Feb. 21 letter to the SEC. The hospitals Ogilby represents include seven in Massachusetts such as Beth Israel, Dana-Farber Cancer Institute in Boston and UMass Memorial Medical Center in Worcester.
One of the hospitals she represents estimates that to compensate for the rising costs, it would have to eliminate more than 250 full-time equivalent nurses, according to the letter from Ogilby, who did not identify the institution. "There has been, effectively, a 'run on the bank,' " for certain types of borrowing, she wrote.
Most of the hospitals are among more than a dozen Massachusetts institutions that in recent years borrowed money at variable rates to lower costs, and purchased bond insurance to make the debt more attractive to investors.
But many of these insurers have come under scrutiny recently for the subprime mortgages they held in their portfolios, scaring off many wealthy investors who previously bid at the auctions.
It isn't clear how the SEC might act. Speaking to reporters after a hearing in Washington yesterday, SEC chairman Christopher Cox said the agency is "looking very carefully at the investor protection aspects" of allowing the bids.
In theory, allowing borrowers to bid on their own bonds could give them the chance to drive down interest rates artificially, which is why the SEC has frowned on the practice in the past. Unlike share repurchases by companies, bond issuers' options usually are more limited by original offering documents. In her letter, Ogilby asked the commission to allow the bids if borrowers publicly disclose their intent to bid, and only when offering documents don't specifically bar them.
The SEC is also weighing a separate suggestion from a trade group, the Securities Industry and Financial Markets Association, that the commission not object if issuers bid on their own securities such as those that had failed to sell at auction, effectively reducing their interest rates or canceling the securities altogether. "We were hoping for a quick answer from the SEC on a more limited question," said Leslie Norwood, a managing director of the association.
Bob Nelson, managing analyst at Thomson Financial, said the appeals show how many borrowers are finding it difficult to change the terms of their contracts.
At Southcoast Hospitals Group in New Bedford, chief financial officer Bill Grigg said he's in the process of refinancing $51 million of auction-rate debt for various building projects. Interest rates averaged under three percent since 2005, but have jumped as high as 11 percent recently.
To bond buyers, his securities are "toxic," Grigg said, even though a rating agency recently reaffirmed its highest rating on the bond insurer Ambac Financial Group Inc. that backed Southcoast's borrowing.
"I'm hoping we can resolve this quickly," he said. "We're spending extra charitable dollars for no real operational reason."
Ross Kerber can be reached at kerber@globe.com.
