In the News: Recent Developments

February 19, 2008

Auction-Rate Turmoil Hits Pittsburgh Medical Center


Turmoil in an obscure corner of the credit markets is expected to lead to a wave of refinancing by institutions that are in danger of finding themselves paying abnormally high interest rates on their bonds.

One of the first to queue up is the University of Pittsburgh Medical Center, which yesterday announced plans to refinance as much as $430 million of bonds. The medical center offered to buy back $92 million of bonds after market rates on some of its existing auction-rate debt topped 17% last week — threatening the center with extra weekly interest costs of as much as $605,000.

Auction-rate securities are long-term bonds that behave like short-term debt. The interest rates are reset in auctions conducted by banks frequently, from daily to every 35 days. The securities — often tax-exempt — are issued by municipalities, museums, student-loan providers and others who like the auction-rate mechanism because it gives them long-term debt that in normal times pays typically low short-term interest rates.

The $330 billion auction-rate securities market became the latest casualty of the global credit crunch last week when auctions on an estimated $60 billion of such debt failed to generate enough investor interest. That caused rates to soar for many universities, municipalities and closed-end mutual funds, which typically tap the market to obtain short-term financing at low rates.

The auction failures multiplied after such leading dealers as Citigroup Inc. and Goldman Sachs Group Inc. last week signaled a pullback from providing more capital to support the market.

Higher rates have hit such well-known institutions as Deerfield Academy, Georgetown University, Carnegie Hall and mutual funds run by money managers including BlackRock Inc., Nuveen Investments Inc. and Pacific Investment Management Co.

Dozens of institutions that have raised money by issuing auction-rate debt will want to refinance to “reduce their borrowing costs,” says Joseph S. Fichera, chief executive of Saber Partners LLC.

The university’s medical center has expanded rapidly in the past decade, partly by gaining a greater share of federal research grants but also through growth overseas and increased marketing of its health-care technology. The system has a $3 billion investment portfolio and a top-tier credit rating.

It also has $2.4 billion in tax-exempt debt outstanding, including $430 million in auction-rate debt. Last week, market rates on its auction-rate debt rose from 3.5% in early February to 10% and 12% last Wednesday, and then above 17% Thursday.

Yesterday’s tender offer covers $92 million of revenue bonds on behalf of the Pittsburgh medical system by Allegheny County Hospital Development Authority. The center plans to get a bank credit facility to finance more refinancing offers, officials there said. “We’re saddled with an unexpectedly high interest-rate environment, and we view this as a solution to address that issue and to get market rates that are comparable with our credit,” said Tal Heppenstall, center treasurer.
—By Randall Smith

Write Randall Smith at

© 2008 The Wall Street Journal

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