The R.I. Health and Education Building Corp. has helped finance many projects for schools, colleges, hospitals and community medical centers in the last four decades, be they renovations, expansions or purchases of new equipment. Now the turmoil on Wall Street has created some challenges for the quasi-public agency and the organizations it works with.
Robert Donovan, RIHEBC’s executive director, answered five questions about it.
PBN: Explain what your corporation does, who it does it for, and why.
DONOVAN: The R.I. Health and Educational Building Corporation was created in 1966 by legislation to be the state governmental entity to issue tax-exempt bonds to finance capital projects by nonprofit health and educational providers such as colleges, universities and hospitals. The corporation also has provided financing for community health centers, charter schools, private secondary schools and, most recently, public schools for municipalities. Currently, the corporation has approximately $2.5 billion in financing with these organizations. The benefit for the 501(c)3 institutions is that it allows them access to tax-exempt financing, which carries a lower interest rate because the interest income for the investor who buys the bonds is exempt from income tax.
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PBN: Is this a typical financing structure? Do other states have entities such as this that deal with 501(c)3s as well as the public sector?
DONOVAN: All states have some structure to allow the 501(c)3 organizations access to tax-exempt financing. In New England, the RIHEBC structure is typical but there are 40 states that have statewide issuers. The majority of them focus on the 501(c)3 organizations with only a few including public-sector projects.
PBN: It’s my understanding the turmoil on Wall Street has affected how RIHEBC does business. What happened to the bond-insurance business and how does the agency deal with those changes?
DONOVAN: Well, credit has certainly become tighter and the lack of liquidity has driven rates up. A number of our borrowers have variable-rate bond issues where the interest rate is reset every seven days. These borrowers have seen the rates increase from 2 percent to over 6 percent in two weeks. This will settle down as liquidity returns to the market place but it is quite a bit of sticker shock. Fortunately, the corporation did not have any deals ready to price the last couple of weeks, but when it does return, the markets will be different. In terms of substituting bank letters of credit for bond insurance, recently Congress authorized the Federal Home Loan Banks to use their letters of credit to enhance those of local banks so we are hoping that will help expand the number of banks in the state who will provide credit enhancement for the bond issues.
With the bond insurers downgrades, access has been restricted. Many of our borrowers benefited from the AAA ratings of the insurers but with their ratings low bank letters of credits are becoming more common. Of course, with more borrowers looking to get letters of credit, the prices are going up along with a limit on their availability. Some of our bond issues have been able to go on their own credit. In the past we would have used insurance, but now it has no value when you are selling bonds to investors.
PBN: What kinds of affects did the collapse of the auction-rate bond market have on RIHEBC?
DONOVAN: Several of our borrowers had auction-rate bonds. At the time the bonds were issued it allowed them to have variable-rate debt without having to pay for a liquidity facility like letter of credit. When the market collapsed with failed auctions, the institutions saw their rates go to 10 to 12 percent. The auction-rate bonds have been refinanced, but the overall cost due to needing a letter of credit has gone up for the institutions.
PBN: Until recently, there were five major investment banks. Now there are two remaining, and they have decided to branch into commercial banking. What does this mean to RIHEBC?
DONOVAN: While most of the news has been centered on the major Wall Street firms, there are still a large number of regional firms that are active in Rhode Island and were not swept up in selling the exotic derivative products that have crippled the financial markets. RIHEBC still has a large selection of firms to use to sell bonds, but it will cost more and take more time, plus there will be more regulatory oversight. The municipal marketplace will continue to be active because it was not the borrowers or their ability to pay that caused the problem. So the current situation will calm down once the investors are able to get back to focusing on the credit of the borrower.
