The University of Pittsburgh Medical Center plans to redeem $430 million of its bonds to stem as much as $500,000 a week in losses caused by a crisis roiling the market for so-called auction-rate securities.The hospital offered to buy back $91 million of its debt yesterday, and will make similar offers for almost $340 million more, according to Tal Heppenstall, UPMC's treasurer. Holders have until March 19 to sell the bonds back for $100.01 of par value plus accrued interest, according to a notice posted on Bloomberg.
Funding costs soared nationwide in the $330 billion market for auction-rate securities as banks from Citigroup Inc. to Goldman Sachs Group Inc. stopped bidding for the debt at the periodic sales they organize. New York state, with $4 billion of auction debt, may convert the bonds to a fixed rate or a different type of variable-rate security, state budget director Laura Anglin said in an interview in Albany last week.
``It's outrageous,'' Heppenstall said. ``We're a AA rated credit. We don't need to get financing from loan sharks.''
Auction-rate securities are long-term bonds on which the interest resets after auctions held every 7, 28 or 35 days. The bonds go to the bidder willing to accept the lowest rate, or remain with current holders and pay the maximum, or so-called penalty, rate if there are no bidders.
Record Rates
The average rate for seven-day municipal auction bonds rose to a record 6.59 percent on Feb. 13 from 4.03 percent the previous week, according to indexes compiled by the Securities Industry and Financial Markets Association.
New York state taxpayers' weekly borrowing costs increased $2.3 million after rates on Dormitory Authority bonds sold for the City University of New York rose to as high as 6.26 percent last week from 3.42 percent. Buffalo's rate on water system revenue bonds soared to 11 percent from 3.30 percent.
Scores of counties, hospitals and colleges are rushing to convert auction-rate securities to lower borrowing costs. On Feb. 15, the Children's Hospital of Philadelphia notified bondholders that it intended to convert $170 million of debt insured by MBIA Inc. with rates that surged as high as 10.05 percent.
St. Louis-based BJC Health System yesterday filed notice that it intends to refund or convert $243.6 million of auction- rate debt insured by FGIC Corp. Rates on the debt have increased as high as 11.99 percent.
Rigged Bids
Until this month, bankers who ran auctions prevented failures by buying bonds. Regulators allow dealers to bid when they choose, and to control auction information as long as they disclose that they might submit bids. Bankers aren't required to buy the bonds and don't have to disclose their purchases, the range of bids or when auctions fail.
Information on auction bonds is scarce. Local governments don't make results or bidding details publicly available as is done with traditional competitive bond sales.
The Securities and Exchange Commission fined banks in a settlement over bid-rigging two years ago. The U.S. municipal bond market's main regulator, the Municipal Securities Rulemaking Board, plans rules requiring banks to disclose more, including the interest rate, bidding details and information about failures.
`That's Enough'
Buyers at last week's auctions for UPMC debt bid just less than the 18 percent penalty rate set for the hospital's bonds. On Feb. 14, $41 million in UPMC securities, which previously sold for a yield of 3.5 percent, were bid at 17.23 percent.
Heppenstall said he believes hedge funds are buying the debt. Other UPMC securities were being bid at 14.99 percent versus a penalty rate of 15 percent, he said.
``We're stuck in a position where high interest rates are costing us half a million a week,'' Heppenstall said. ``So we came up with a proposal for UPMC that we think has wide applications.''
After repurchasing the auction-rate securities using local bank credit lines, the Pittsburgh hospital plans to issue long- term, fixed-rate debt, Heppenstall said.
``We put up with this for a week, but that's enough.''
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