For hospitals preparing to sell bonds and facing the cost and delays of going through the local issuer approval process, a little-known Wisconsin entity with nationwide coverage may be an option worth considering.
Most not-for-profit hospitals wanting to sell tax-exempt bonds must go through a state or local government entity, known as a conduit issuer. The conduit issuer will sell the bonds on behalf of the borrower, known as the obligor.
Depending on location, obligors may have access to one or more issuer at the state, county or city level.
In some cases, the issuer approval process can mean high issuer fees and delays, or the project may be challenged for various reasons, leaving obligors with no local options.
Several states have entities that will issue bonds for projects located in other states, but they typically require borrowers to show the financing will have a direct economic impact on the issuer's state.
Wisconsin is the exception. In 2010, the Wisconsin state legislature created the Public Finance Authority (PFA), a conduit issuer with a mandate to issue taxable and tax-exempt bonds on behalf of municipal borrowers nationwide, with no economic impact requirement.
PFA has clearly found its niche. Since inception, the authority has sold more than 120 bond issues totaling over $3 billion in 40 states.
Above: States Where PFA Has Issued Bonds Since 2010.
Close to half of the debt issued by PFA is unrated and privately placed, with another third rated investment grade (BBB- or higher) and sold through public offerings.
PFA has been most active in the housing and higher education sectors.
In 2015, PFA did its first hospital financing for Renown Regional Medical Center in Nevada. The $141 million "A" rated public offering took advantage of discounted pricing offered to healthcare borrowers with an issuer fee capped at $25,000 and no annual administrative fees.
* Based on Customer Bought trades. Source: EMMA.
The current PFA fee schedule shows 501(c)(3) borrowers are charged 20 basis points up to $20 million, an additional 5 basis points on amounts over $20 million, and an annual administration fee of 3 bps.
Even without discount, PFA fees can be less than what many local issuers charge.
PFA bonds are typically exempt from federal income tax, but unlike bonds sold through local issuers, they are not state tax exempt. In Renown's case, Nevada has no state income tax so the bonds likely priced the same as if sold through a local issuer.
The prospect of favorable economics is one thing, but PFA's key value proposition is the potential to bypass much of the local politics and delays involved with some local issuers.
Depending on the type of project and local politics, disagreements can arise during the issuer review process, leading to delays or even the project being turned down.
When issuers drag their feet, the ability to go to a different issuer removed from the political process can make all the difference.
Obligors who choose to issue new money through PFA or another out of state issuer are still required under IRS rules to get TEFRA approval from a local applicable elected representative, but this can be a city or a county and does not have to be a local issuer.
PFA claims it can move faster and cost less, but by competing with local issuers, the authority does not always get a warm welcome.
Some critics claim that because PFA is willing to back deals spurned by regulators elsewhere, investors may be buying bonds that otherwise might never get sold. This may be true for risky projects, but is less of a concern for hospitals rated in the "BBB" category or better. Others point out that PFA is one of the few issuers run without a public employee as director, which may lead to lack of oversight.
These objections may have more to do with the bond markets' preference for the status quo, as there are situations where PFA could be a viable alternative worth considering:
- Health systems operating in multiple jurisdictions where the logistics of seeking interlocal agreements become too complex;
- Issuers with limited experience in the healthcare field or infrequent activity;
- Issuers with high costs including issuer counsel fees;
- Issuers with limited capacity or seeking to preserve ability to issue Bank Qualified bonds.
If any of these situations apply, the hospital should discuss specifics with their financial advisors and if a state issuer may be available on favorable terms.
If not, PFA may be a worthy option.
More information on the Public Finance Authority can be found at http://www.pfauthority.org.