Tri-City hospital board approves interest-only loan
By Paul Sisson, North County Times
After nearly one year of financial frustration, Tri-City Medical Center appears to have found a willing bank to help the public hospital refinance $53 million in long-term debt.
At a special meeting Wednesday night, with thunder and lightening crashing in the heavens outside, hospital trustees unanimously gave Chief Executive Officer Larry Anderson the authority to finish a 15-month, interest-only bridge loan with Los Angeles based CapitalSource Bank.
Though they all voted to proceed with the deal, none of the directors did so with smiles on their faces. The loan, which will carry an interest rate of about 5 percent when fees are included, requires Tri-City to place all of its reserve cash, about $51 million, into a money market account at CapitalSource as collateral. If Tri-City defaulted, then the bank could go after the cash, though loan documents indicate that it could not seize any hospital property or equipment.
Only the first $250,000 of the account is insured by the Federal Deposit Insurance Company, meaning that the rest of the deposit will be uninsured unless Anderson is able to purchase insurance from a third party.
Anderson told board members at Wednesday's meeting that he thinks that will happen.
Over the last year, Tri-City has struggled under the terms of a previous refinancing deal that the hospital board approved in 2007. That deal had the hospital purchase auction-rate bonds, with an interest rate set every week in a public auction to investors.
When the board approved the refinancing, auction rate securities were delivering interest rates much lower than more traditional revenue bonds did. However, an international credit crisis, ignited by the collapse of risky mortgage-backed securities, caused the interest rates to jump as high as 14.5 percent. Suddenly Tri-City found itself paying as much as $500,000 per month in extra unbudgeted interest payments.
Recently rates have gone down again, but Anderson said that the volatility of the auction-rate market makes it difficult for the hospital to stick to a budget.
"We can't predict from week to week what our costs are going to be," Anderson said. "I open my e-mail and cringe because I'm assuming the worst. It was 4 percent this week, but, you know, it could be 14.5 percent next week."
Anderson said he is working with the well-known investment bank Goldman Sachs to get Tri-City a credit rating so that it can re-enter the tax-exempt bond market, perhaps within the next 15 months.
Though trustees said they did not like the idea of proceeding with an uninsured deposit while hoping for a good credit rating in the future, they ultimately said they trusted Anderson and board attorney Greg Moser.
"I do have a lot of trust in this CEO and legal counsel," said Director RoseMarie Reno.
Board Chairwoman Madeline Rodriguez noted that Tri-City is violating the covenants of its existing auction-rate bonds and has received a reprieve only until March 31. She said that there was little choice but to move forward.
Rodriguez said she had done her homework on the deal, and found it much easier to understand than the 2007 deal.
"We're pressed against the wall," she said. "I have to say, the overall picture is much easier to understand than when we did the auction-rate securities."
Tri-City also plans to get an additional $20 million revolving loan form CapitalSource to allow the hospital to continue its expansion plans while all of its discretionary cash is being held as collateral.
Call staff writer Paul Sisson at 760-901-4087.