Nonprofits Want to Bid on own Bonds

Soaring debt costs due to the massive failure of the auction-rate securities in the last month have driven hospitals and nonprofits to seek permission from the SEC to bid on their own bonds.

The idea is to allow hospitals, universities, nonprofits, and government agencies a way to avoid interest rates driven up by the global credit crunch by participating in auctions that set rates on their own securities. When auctions fail, many reset at interest rates as high as 20 percent and create millions of dollars in extra borrowing costs.

Anne Phillips Ogilby, a Ropes & Gray attorney representing 14 hospitals such as Beth Israel, Dana-Farber Cancer Institute, and UMass Memorial Medical Center, estimates that one of the hospitals she represents would have to eliminate more than 250 full-time equivalent nurses to compensate for rising costs.

Hospitals and their allies in Congress are asking the SEC to allow institutions to bid on their own securities in such situations without raising concerns they are manipulating markets. Such bids would allow the institutions to avoid the highest rates that kick in when auctions fail, without the expense of retiring or refinancing the entire borrowing.

Most of the hospitals are among more than a dozen Massachusetts institutions that in recent years borrowed money at variable rates to lower costs, and purchased bond insurance to make the debt more attractive to investors. But many of these insurers have come under scrutiny recently for the subprime mortgages they held in their portfolios, scaring off many wealthy investors who previously bid at the auctions.

So far, SEC actions are unclear. Hypothetically, allowing borrowers to bid on their own bonds could give them the chance to drive down interest rates artificially, which is why the SEC has frowned on the practice in the past. Unlike share repurchases by companies, bond issuers’ options usually are more limited by original offering documents.

The SEC is also weighing a separate suggestion from a trade group, the Securities Industry and Financial Markets Association, that the commission not object if issuers bid on their own securities such as those that had failed to sell at auction, effectively reducing their interest rates or canceling the securities altogether.