Fletcher Allen Partners to discontinue debt strategy

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Fletcher Allen Partners to discontinue debt strategy

Thu, 09/11/2014 - 4:01pm -- tim

by Morgan True vtdigger.org The parent organization of Fletcher Allen Health Care plans to stop using a debt strategy that includes interest rate swaps, a mechanism that effectively allows an borrower to bet on the future direction of interest rates. One of these financial instruments cost Fletcher Allen Partners $3.1 million to cancel. The debt strategy came to light at a Green Mountain Care Board hearing on hospital budgets last month, when a union representing health care workers criticized the institution’s borrowing practices. Testifying before the board, surgical and pediatric nurse Travis Beebe-Woodard, of the Vermont Federation of Nurses and Health Care Workers, said the interest rate swaps are inconsistent with Fletcher Allen’s nonprofit, patient-focused mission.

“As a bedside provider, it’s concerning that the institution would send (millions of dollars) to Wall Street to leverage against debt rather than invest that back into care for patients.”

“As a bedside provider, it’s concerning that the institution would send (millions of dollars) to Wall Street to leverage against debt rather than invest that back into care for patients,” Woodard said. He accused Fletcher Allen Partners management of being too focused on high finance instead of health care.

Officials at Fletcher Allen Partners said the swaps were made in the mid-2000s, when bankers and financial advisers were touting them as a better way to manage debt.

When the market crashed in 2008, however, the hospital network was stuck paying a fixed interest rate while its swap product yielded a much lower variable rate.

“Based on the information at the time it looked like a good bet,” said Todd Keating, CFO of Fletcher Allen Partners. “Everybody was feeling good about the economy … nobody saw 2008 coming, and when it did, it was a rude awakening for many institutions around the country.”

In May 2008, Fletcher Allen tried to get out of the deal, paying a $3.1 million “termination fee” to cancel one of its swaps. It also paid $1.6 million in bank fees to service its rate swaps, but all loans carry bank fees.

In the intervening years, Fletcher Allen Partners continued to lose money on the swaps, recording $22 million in “unrealized” losses for fiscal year 2012. As the market rebounded, the swaps earned back $9.5 million in FY 2013, and the hospital network said its potential losses total $8.6 million. The unrealized losses, or gains, disappear if the loan is repaid in accordance with its terms, the hospital said.

Fletcher Allen Partners currently carries swaps on 17 percent of its $388 million debt, or roughly $65 million. The total liability of those swaps, or the amount it would have to pay to get them off the books, is $17 million.

Keating said the current losses of $8.6 million are “unrealized” because the swaps contain agreements that any fluctuations in value would be wiped off the books if the principal of the loan is paid on time.

But Keating acknowledged the swaps would be a serious liability if the market were to crash again.

Keating said that when he became CFO of Fletcher Allen Partners last year, his “biggest problem” with its debt portfolio was the interest rate swaps.

Keating took the CFO job at Fletcher Allen Partners three months ago. He previously worked as the financial officer for UMass Memorial Health Care in Worcester, Massachusetts. He said the hospital did not use this type of investment, but that was because its financial condition was not as strong as Fletcher Allen’s.

Keating said Fletcher Allen Partners plans to divest its swaps and will likely do so through the issuance of new bonds.