From The Bond Buyer - Sarasota County, FL (July 29, 1998)
by Robert Whalen
Conventional wisdom has it that hospital deals hit the municipal market through negotiation.
So much for convention.
Just a couple of weeks ago, Dale Beachey, chief financial officer of the Sarasota County, Fla., Public Hospital District, not only opted to issue debt competitively for the first time ever, but also did it via the Internet.
Beachey said the deal -- fairly straightforward and insured with a healthy underlying credit -- lent itself nicely to the competitive bidding process. What's more, he said he wanted to bolster participation by using the maturity-by-maturity option so far offered only by cybersale pioneer MuniAuction Inc.
Interestingly, the deal was captured by an all-or-none bid from A.G. Edwards & Sons Inc. with a true interest cost of 4.7297%, besting the aggregate maturity-by-maturity TIC of 4.7975%.
"In this particular situation we thought it fit well, and I believe we were correct," Beachey said. "We got a very favorable rate and I think it reflects the kind of demand there is for bonds in Florida. A competitive deal indeed makes sense."
Perhaps that's easier said with 20-20 hindsight, but the numbers over the past five years indicate that the negotiated route has become increasingly popular. In 1993, of the 1,130 health care issues, only 70 were sold competitively, according to Securities Data Co. And that 6% mark has dropped consistently, sinking to 3% -- or 29 out of 924 deals -- last year.
According to George Friedlander, a strategist and managing director at Salomon Smith Barney Inc. -- which led the pack last year, underwriting $4.3 billion of health care debt -- there is a good reason for that trend.
"Hospital credits tend to be fairly complex in terms of analyzing their ability to pay," Friedlander said. "Complex credits require more premarketing to institutional investors ... and that premarketing is done way more easily on a negotiated basis."
Friedlander said that aside from the complexity of the credit, structuring issues -- such as coupons, maturity structure, and call protection -- also pose challenges. While hospital deals are not the most troublesome to sell, they are on the "far end of the spectrum," he added.
But Bob Davis, a senior vice president at Ponder & Co., the hospital district's financial adviser, said that trend may change.
"To the extent that you have an insured transaction and a solid underlying credit, it would be my view that the competitive sale of bonds is absolutely an avenue that is open to you even though you are a health care issuer," he said.
Helping to lead the hospital district down that avenue was the relatively new technology of Internet bidding, he said.
"The technology was certainly one of the considerations," Davis said. "It's the ability to do the all-or-none or maturity-by-maturity [bidding] -- which would give smaller, regional firms that ability to bid on the bonds."
Davis said market participation had been his sole concern about the transaction, but that was set aside the day before the sale when prospective bidders registered with MuniAuction.
"The participation by regional firms and many firms that would not otherwise be involved in a traditional competitive bid had the effect of making it a real auction, thus allowing Sarasota to realize great savings," said Anne Donahoe, a vice president at Ponder, which handled more health care deals than any other financial adviser last year.
Donahoe had been keeping a watchful eye on MuniAuction since the first Internet-bid deal last November and played a key role in choosing the auction format, she said.
She took a look at the electronic bidding system offered through Bloomberg LP's proprietary network, but ruled it out because it lacked the maturity- by-maturity option.
"We started looking at MuniAuction back when they did their first deal, and met with them in December," Donahoe said. "Since that time [we've] tracked very carefully the results of each subsequent deal. For this transaction, this was a perfect fit for what our client wanted to accomplish."
Following internal analysis, Davis said he was very pleased with the deal's pricing.
"We can perform just as well in the market doing a competitively bid transaction," he said. "Just as well or better."
And Donahoe said that hospital bonds -- with high credit ratings, either on their own or through insurance -- are becoming "commodities".
"There's a large universe of buyers out there for those kinds of credits, and what we felt was that going this route would open up the transaction," she said. "I would expect it to become a trend, especially if hospitals that do it have the kind of results that Sarasota had."
In the right scenario, a competitive deal can be a "very viable" alternative for hospitals, Beachey agreed. However, he said it is best to stick with a negotiated underwriter sometimes. The district is currently working on a complicated refunding-interest rate swap deal to be priced in the next few weeks by Goldman, Sachs & Co.