- Moody’s ratings are widely used as trigger events in bond, bank and swap documents
- Bank of America letters of credit are likely to be put back by money market funds
- Banks may be required to post additional swap collateral depending on terms and mark-to-market value
- Swap policies requiring minimum counterparty ratings may need a dusting.
FOR AN UPDATE, READ: Bank Downgrade, Borrower Uncertainty (Modern Healthcare 6/25/2012).
Long Term Rating Downgrades
Following the downgrades, some of the banks acting as swap counterparties may be required to post additional collateral. This will depend on credit support terms contained in the swap documents and, of course, assumes the swap value is in favor of the hospital. Also, if the hospital has a swap policy in place, it should be reviewed to ensure that the minimum counterparty ratings required in the policy are still met. If not, the policy may need to be revised (see Five Tips for Managing Swap Counterparty Risk). Note that for hospitals with swaps, the absence of a swap policy is generally considered a negative by rating agencies.
Short Term Rating Downgrades
Hospitals who still have letters of credit with banks downgraded from P-1 to P-2, which includes Bank of America, should be concerned. Since their short-term rating is no longer in the "first tier" category, bonds backed by these LOC's are likely to be put back next Wednesday, which is when 7-day VRDO's are remarketed. Smart CFO's who read Hospitals With Bank LOCs Should Plan Ahead either found a substitute bank or refinanced with a bank direct placement or bond offering.
This material is intended for general information purposes only and does not constitute legal advice. For legal issues, readers should consult legal counsel. To discuss this article or municipal advisory services, email or call 888-699-4830. HFA Partners, LLC is an Independent Registered Municipal Advisor registered with the Securities and Exchange Commission (SEC) and the Municipal Securities Rulemaking Board (MSRB) under the Dodd-Frank Act of 2010.
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