Credit turmoil now squeezing local nonprofit organizations

WGBH among those hit by higher borrowing costs

Here's one expense WGBH doesn't mention during its on-air fund-raisers: $1 million in unexpected interest charges.

The public television giant is the latest nonprofit in New England to be squeezed by the turmoil in the credit markets, and the additional cost is forcing the Boston broadcaster to reevaluate new programming it had planned for this fall.

"Sadly, first and foremost where the impact will come is on our ability to expand," WGBH chief executive Jonathan C. Abbott said. The most likely candidates are special onetime editions of public affairs programs, Abbott said; he doesn't anticipate having to cut any of WGBH's existing shows.

The station isn't the only one feeling the pinch. Earlier this month, New Hampshire's largest provider of student loans said it will no longer offer certain loans for its neediest applicants because rising interest rates have made them too expensive. A Massachusetts student loan agency expects it will have to charge borrowers higher rates on loans later this year, in order to be able to resell them to investors. And monthly debt payments for the Massachusetts Turnpike Authority could rise from $336,000 to $2 million by January, which would eat up most of a recent toll increase.

The issue dates back to last summer, when the meltdown in the subprime mortgage sector triggered a wider crisis in credit markets, as many institutions stopped loaning money out of fear that even conventional commercial borrowers could default. While for-profit companies have experienced similar borrowing problems, nonprofits have been particularly hurt because of the ways many borrow money.

Unlike most for-profit firms, many nonprofits sell their debt at weekly auctions that determine the interest rate on their borrowing. Others, such as WGBH, use "variable" bonds whose rates reset every week based on certain bond indexes, often tied to complex "swap" agreements that also have proven volatile. The station has borrowed $124 million since 2002 for items including its glamorous new headquarters in Brighton and to buy a radio frequency in the Brewster area.

Traditionally these have been safe, conservative lending avenues for nonprofits, and had offered the benefit of lower short-term interest rates on long-term debt. Furthermore, to make their debt more attractive to investors, many bought bond insurance from XL Capital Assurance, Ambac Financial Group Inc., and other providers.

The problems emerged because the bond insurers were investing in instruments tied to subprime mortgages. Those holdings have spooked investors, who are worried that the questionable investments would lead to the insurers' credit ratings being downgraded. That, in turn, would increase the risk of the nonprofit bonds they backed.

As a result, many investors stopped buying variable bonds or those sold at auction. Without buyers, interest rates on the nonprofits' loans spiked - from around 3 percent last year to as high as 20 percent recently. At WGBH, even a more modest increase in interest rates proved costly. Lately its borrowing costs have risen as high as 9 percent, from around 3 percent last year, adding an additional $100,000 or so to its borrowing costs - each week. The station isn't alone; local schools such as Tufts, Brandeis, and Bentley and other nonprofits have collectively been forced to spend millions of dollars for additional interest on their outstanding debt since Jan. 1.

Many borrowers have not had to cut back on operations - yet. Benson Caswell, executive director of the Massachusetts Health and Educational Facilities Authority, which helps local nonprofits issue bonds, said borrowers are now digging deep into contingency funds but may soon be forced to scale back future expenses, such as buying new equipment.

"This is eating into the future," he said.

Moreover, nonprofit hospitals and other medical providers are not likely to refinance out of the troublesome loans because of the bigger cost pressures facing the healthcare industry.

"Healthcare is under such pressure on its own that for some the financial situation has deteriorated and it would be difficult for them to go out with a new bond issue to pay for the old bond issue," Caswell said.

On March 14, the Securities and Exchange Commission said it would permit institutions to buy their own bonds at auction under certain circumstances, thus avoiding the interest-rate spikes that drive up their debt payments. Democrats in Congress have also begun floating various fixes that would ease the borrowing burden on nonprofits and local governments.

The pressure is likely to continue so long as insurers face questions from credit rating agencies about their financial health. The insurer used by WGBH, Ambac, had its high rating reaffirmed by Moody's Investors Service and Standard & Poor's earlier this month, but both agencies raised concerns about the insurer's future.

Seeking a way out of the morass, WGBH and other local nonprofits also are trying to refinance or restructure their debt into lower-cost loans with more stable rates. On March 13, the state agency MassDevelopment gave a crucial go-ahead for the television station and five other nonprofits, including Worcester Polytechnic and Mount Holyoke College, to proceed with those arrangements. In New Hampshire the state college and university system is refinancing its auction-rate debt after estimating it will face more than $1 million in unexpected interests costs.

But WGBH might not be able to complete the refinancing until April; in the meantime it will continue to rack up six-figure interest charges it hadn't budgeted for. The station says it has contingency funds to cover those costs so far this year.

Overall, Abbott said, the situation shows how the bond insurers involvement with subprime lending became an unexpected problem for unsuspecting institutions like his own. "It's like a virus, the way it's infected the financial markets," Abbott said. "You've got a lot of relatively conservative institutions that are just dismayed."

Ross Kerber can be reached at kerber@globe.com.

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