The cash Albert Einstein had available on March 31 was lower than the median for hospitals in the BBB rating category, according to a May 8 report from Fitch Ratings. The company is rated Baa2 by Moody’s Investors Service.
“We had 53 separate institutional investors, so very widely distributed, very widely accepted in terms of both the pricing and in terms of the security covenant package,” said Ertel.
Investing a debt service reserve in lower-yielding government securities would be a “financial drag,” Ertel said.
A portion of the bonds from Albert Einstein’s May sale that matures in 30 years yielded 4.72 percent at issue and has since declined to 4.57 percent in secondary trading.
Einstein paid a spread of about 1.3 percentage points more than benchmark municipal bonds to issue the debt, less than the 1.32 points charged to the similarly rated Boston Medical Center, which had a reserve fund for a bond issue in April.
In January, Peninsula Regional Medical Center, a hospital on Maryland’s eastern shore, sold about $127 million of debt with a provision allowing the issuer to pledge accounts receivable for other loans, subordinating the rights of bondholders.
Pledging Receivables
That practice is “highly objectionable,” said Jim Murphy, who oversees, T. Rowe Price Group Inc.’s $3.4 billion Tax-Free High Yield Fund. “They’re saying they reserve the right to effectively prime you and give that collateral to another lender,” Murphy said. “We’re seeing it more and more.”
The importance of receivables as a security pledge was highlighted in the 2007 bankruptcy of Pascack Valley Hospital in northern New Jersey, Murphy said. When Pascack filed, it had about $19 million in accounts receivables and about $79 million of debt, he said. The security helped boost bondholder payouts to 60 cents on the dollar, he said.
Murphy passed on Peninsula’s bonds, which also weren’t secured by a mortgage.