Although hospital bonds nationwide are almost never underwritten competitively, New Jersey's health care financing agency says its one-year experiment with the process has found that there is room after all for the bid systems.
"It seems like there is a place for competitive deals in the right circumstances," said Steve Fillebrown, deputy director of research and information services at the state's Health Care Facilities Financing Authority, which issues most of New Jersey's hospital bonds. "We have found that we can do them, but we just have to use them carefully."
The authority sold its first competitively bid hospital bond issue last September, a $100 million transaction for St. Peter's Medical Center in New Brunswick. A $34 million issue followed in December for Shore Memorial Health Care System in Somers Point. And Fillebrown said another two issues, totaling about $100 million, are expected to be competitively bid in the next two to three months.
The authority's dabbling in competitive bids was not a matter of choice. Former Gov. Jim Florio, responding to a political scandal, signed an executive order last May requiring all state agencies to issue debt through competitive bids, except under special circumstances. At the time, the authority had not sold a single bond issue competitively in its 21-year history.
In practice, the authority has been the most prolific applicant for waivers from the rule, and has continued to issue the majority of its debt through negotiation. The authority's two competitive deals amount to just 23% of the $578 million of bonds the authority has sold since the executive order, according to Securities Data Co.
But even at that slow pace, Florio's mandate has made the authority by far the biggest user of competitive bidding among the nation's major hospital bond issuers. The $135 million of competitive deals priced by the authority in 1993 compares to just $39 million for all other hospital bond issuers combined last year, according to Securities Data.
Underwriters say the reasons are clear why hospital bond issuers shun the competitive market like virtually no other issuer group.
"Extremely few deals nationwide are done competitively because the health care industry generally is perceived as a story sector and the credits are guilty until proven innocent," said Glenn Wagner, a vice president of research at Morgan Stanley & Co.
But adapting to wrenching change has become a way of life for officials at the New Jersey hospital authority.
In the past two years alone, a federal judge nullified the state's $1 billion reimbursement system for uninsured health care, the New Jersey legislature instituted a sweeping health care deregulation program, and the rating agencies downgraded a block of hospitals they said would have trouble adapting to the new highly competitive environment.
Then last May, in the midst of it all, Florio issued his executive order.
As the dust settled, agency officials won praise from investors and analysts for their forthright disclosure and intensive education campaign throughout the turbulent deregulation period.
And now, at the one-year anniversary of Florio's order, agency officials say they are coming to terms with competitive bidding as well, even as the new governor, Christine Todd Whitman, has begun reviewing the policy with an eye toward easing the ban on negotiated sales.
Fillebrown said that even in the absence of a state mandate, it may make sense from a purely economic standpoint for the authority to continue looking for opportunities to sell debt competitively.
"We're finding some deals lend themselves very well to the competitive market," he said. "There may be deals for which a competitive sale offers the lowest cost of capital."
Fillebrown said one of the key factors in deciding to use competitive bidding has been whether an issue carries insurance. Municipal Bond Investors Assurance Corp. has insured both of the authority's competitive transactions to date, and the two upcoming deals will carry insurance as well, Fillebrown said.
Although Fillebrown did not rule out the idea of selling an uninsured hospital credit by competitive bid, he said it is highly unlikely the authority would do so anytime soon.
Other deals that lend themselves well to the bidding process are typically large, because they tend to attract more bidders, Fillebrown said.
New-money issues are also better suited, he said, since refundings introduce the added wrinkle of escrow funds which Fillebrown said might be too complicated to structure in the competitive process.
Market conditions, extremely favorable for the two competitive deals sold last year, are also a key factor, said Fillebrown and underwriters familiar with the authority's deals.
Edward C. Malmstrom, a managing director at Merrill Lynch & Co., which won the bidding on both of the authority's competitive issues, agreed that several factors combined to make the transactions work. In particular, Malmstrom said, the strong market tone at the time, the scarcity of New Jersey paper, and the MBIA guarantee were important in attracting several bids for each transaction.
Strong retail demand for the issues also convinced Merrill Lynch to bid aggressively on the deal, since the firm has one of the largest retail operations on the Street, Merrill officials said.
As a general rule, however, underwriters say hospital deals are usually better served by the negotiated route.
"In our discussions with hospitals, whether it's New Jersey or the rest of the world, we've found their view in health care is that because the credits are evolving and because of health care reform, negotiated makes more sense," Malmstrom said. "Another downside is that you give up flexibility in terms of market timing and structure."
