Hospitals could be forced to buy back $8bn of debt

--like ARS, VRDN issue long term debt using short term rates --$400 bil VRDN usually have backstop from banks, ARS do not. By Rebecca Knight in Boston and Nicole Bullock in New,York Published: October 30 2008 02:00 Last updated: October 30 2008 02:00 US hospitals may be forced to buy back more than $8bn (£5bn, €2bn) of debt as a result of turmoil in the credit markets, adding to their burdens just as a weakening economy is draining resources. The problem for the hospitals involves so-called variable rate demand notes and other securities that they have agreed to buy back in some cases. The interest rates on VRDNs reset periodically and investors have the right to reject the new terms and sell the paper back to the issuer or a bank. An estimated $400bn in VRDNs have been issued in the US and most require banks - rather than the issuer - to buy back the debt. However, Moody's Investors Service, the ratings agency, said 24 not-for-profit hospitals in the US have issued $8.4bn of debt requiring them to buy back the paper. Lisa Martin, senior vice-president at Moody's, said three hospitals - NorthShore University HealthSystem in Illinois, North Mississippi Health System and Virginia's Riverside Health System - have had to repurchase such debts. Although they all have sufficient cash to meet their obligations, the repurchases were described as highly unusual by Moody's. In the past, hospitals could usually count on their bankers to find new buyers for such debts. "Three out of 24 might not sound very bad, but it is unprecedented," Ms Martin said. "There has rarely been a situation where a hospital has not been able to find a new buyer." If hospitals find themselves without sufficient funds to buy back the debt, they might have to default, Ms Martin said. Moody's is looking into whether hospitals that have issued these notes have sufficient resources to buy them back. The payment pressure comes at a bad time for US hospitals. A rising number of patients are falling behind on hospital bills as health insurance costs rise. "Because of the weaker economy, employers are dropping healthcare coverage, reducing coverage or requiring employees to pay more," Ms Martin said. Tigher conditions in the credit markets are making it more difficult for hospitals to borrow from other sources. Some have delayed bond sales needed to finance new construction or equipment purchases. "[Hospitals] are trying to borrow money to make much needed improvements and upgrades to their systems, such as purchasing IT equipment, but there's no lending going on, and the costs are going up," said Mike Rock, lobbyist for the American Hospital Association. "In some cases they've seen their interest rates rise from two to eight [percentage points]." The problems with VRDNs echo those of auction rate securities, which also reset interest rates at short-term intervals. The rationale for such securities is that they enable borrowers to access long-term funding at short-term rates - a strategy derailed by turmoil in the short-term debt markets. The difference between the two kinds of securities is that VRDNs have a "backstop" - a buyer of last resort. However, investors have found this feature less reassuring because of fears about the banks that provide support in most cases. "There were very few failed remarketings until we entered the credit crunch," said Philip Fischer, a Merrill Lynch municipal strategist. "In this environment, we have had a variety of them."