The report entitled The Appeal Of Alternative Financing Is Not Without Risk For Municipal Issuers is a nimble 4-page warning to hospitals about the risks lurking in bank direct placements and other "alternative" products. These products are getting more popular as LOCs come up for renewal in record numbers in 2011, and, to a lesser extent, in 2012.
The report specifically targets healthcare and higher education borrowers as more voracious consumers of variable rate debt. Judging from the questions fielded during the call today, it looks like S&P wants primarily to make sure that borrowers read bank documents, particularly covenants that could lead to acceleration. It looks like many hospitals haven't.
As with LOC-backed debt, S&P distinguishes between predictable, and unexpected risk. Predictable risk is a facility coming up for renewal. Unexpected or event risk is a failed remarketing, collateral posting on swaps, swap termination payments, and unexpected acceleration.
The report does mention that remarketing risk may not apply, and in the case of bank direct placements, we have to agree. In addition, S&P points out that alternative product renewal periods are typically longer than with traditional LOC-backed VRDOs. This is one of the key benefits of direct placements.
The report concludes with a warning that more borrowers will be asked to quantify predictable and event-driven exposure, as well as the circumstances that could lead to liquidity calls, and how management plans to respond. For those who haven't done so already, it may be a good time to start reading bank documents.
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