Continued: Hospitals hit hard by bond markets

The latest upheaval in the U.S. bond market threatens two major Minnesota hospital chains with serious financial pain.

But the turmoil is saving some Twin Cities-area taxpayers millions of dollars.

Park Nicollet Health Care Services this week alone will pay an extra $86,000 in interest on its outstanding debt. In a few days, the tab will soar to $450,000 a week in extra payments. The clinic is acting fast to staunch the bleeding, which would drain $23 million a year from its coffers if nothing were done.

Fairview Health Services so far has escaped the credit squeeze that has trapped other debtors. But in the next 30 to 90 days, if Fairview can't refinance its $450 million in debt, the chain of hospitals and clinics could see a jump in its interest rates that would cost it an extra $3.5 million a month.

"It's not something I'm panicking about but it's something we're working to fix as fast as we can," said James Fox, Fairview's chief financial officer. "I won't be taking vacation anytime soon."

What's behind the problem is that investors are shunning bonds backed by insurers such as Ambac Financial Group and MBIA, which have disclosed in recent months that they face substantial exposure to securities linked to subprime mortgages. That has made their commitment to back municipal bonds and other low-risk debts suspect, with many would-be buyers fearful that they would go unpaid in the event of defaults. As a result, some bonds are going begging for buyers, and deals are getting done only at higher interest rates than anticipated.

Particularly hard hit are auction-rate securities, in which principal repayments are fixed over a period of years but the interest rates can change every week.

Park Nicollet was hit Wednesday with what is known as a debt auction failure, when buyers refuse to buy debt at the prices the issuer expected. The interest rate on $43 million of its debt soared from 3 to 13 percent in order to attract takers. An additional $189 million of its debt needs to go to auction.

"That entire $232 million will fail [in auctions] over the next three weeks," said David Cooke, Park Nicollet chief financial officer.

"We're going to fix this."

The company hopes to refinance its debt and has dumped Goldman Sachs as its investment banker in favor of Wells Fargo & Co.

Fairview has been luckier -- so far.

"RBC Dain Rauscher and Citigroup are supporting our obligations and bringing them into their inventory," said Fox, Fairview's CFO. "That will get harder and harder as this spreads, as there are fewer buyers out there."

Goldman, Citigroup and UBS have already let some debt go without buyers, a departure from their past role as buyers of last resort.

Wells Fargo has a better record in standing up for clients, Cooke said.

"What we have done and continue to do is support our customers," said Perry Pelos, Well Fargo executive vice president of commercial banking.

He noted that Wells, unlike many major banks, continues to have a top credit rating, "AAA."

"Nobody has an unlimited amount of capital," Pelos said. "But if you compare Wells Fargo to the other financial institutions in the world, Wells compares favorably."

While many debt issuers are getting punished, municipalities that have kept their AAA ratings -- meaning they are considered a sure thing to make repayment -- are seeing their costs to borrow go down.

"The flight to quality benefits us," said Matt Smith, finance director for the city of St. Paul. "We've got taxes. We probably are a better bet than a hospital."

Hennepin County, which like St. Paul is AAA rated, this month will pay about $60,000 in interest on its debt. In November, it was paying $200,000 a month.

The interest rate on outstanding debt for Minneapolis is down nearly 2.5 percentage points from a year ago. The city now pays 1.3 percent interest on $220 million in variable-rate debt. Park Nicollet already is paying 10 times that on some of its bonds.

"If it's fear and not fundamental credit underpinnings [driving the rate surge], you'd expect this to be temporary," Minneapolis' finance director, Pat Born, said.

But, he added, "However long that temporary period is, they're going to pay a lot more than they're accustomed to paying."

Mike Meyers • 612-673-1746