Bank direct placements have increasingly replaced public bond offerings in the past few months for hospitals looking to rein in issuance costs, according to an HFA Partners report.
Bank direct placements are like publicly-sold bonds in that they are issued for new money or refunding purposes; however, they are sold directly to a single bondholder, such as a bank, that holds the bonds to maturity. HFA Partners explained five benefits and drawbacks to bank direct placements:
Benefits:
1. Low coupon. Banks are pricing direct placements aggressively at lower spreads than what public bond markets require.
2. No middleman. With only one bondholder, underwriters are not an issue.
3. No rating agency. Direct placements do not require a rating, thus eliminating rating agency presentations and fees.
4. No debt service reserve fund. Banks don't require a debt service reserve fund, which could lower the size of the offering.
5. Less disclosure. Banks do not have to disclose as much in official statements, and this reduces legal fees and closing time.
Drawbacks:
1. Shorter final maturity. Large balloons create significant renewal and refinancing risk.
2. Size limit. Public offerings can theoretically handle unlimited amounts, but for most banks, $60 million to $80 million is the upper limit, depending on several factors such as a hospital's credit quality.
3. Additional requirements. Banks might attach extra strings, such as treasury, cash management, deposit and trust accounts, which add other business fees.
4. Tax risk. Direct placements have certain language that could increase the coupon if the tax-exempt interest became taxable due to changes in the tax code.
5. Material adverse changes language. This language gives banks a way to call the bonds if a change materially and negatively affects the business or operations of the borrower, which doesn't exist for publicly-sold bonds.
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Bank direct placements are like publicly-sold bonds in that they are issued for new money or refunding purposes; however, they are sold directly to a single bondholder, such as a bank, that holds the bonds to maturity. HFA Partners explained five benefits and drawbacks to bank direct placements:
Benefits:
1. Low coupon. Banks are pricing direct placements aggressively at lower spreads than what public bond markets require.
2. No middleman. With only one bondholder, underwriters are not an issue.
3. No rating agency. Direct placements do not require a rating, thus eliminating rating agency presentations and fees.
4. No debt service reserve fund. Banks don't require a debt service reserve fund, which could lower the size of the offering.
5. Less disclosure. Banks do not have to disclose as much in official statements, and this reduces legal fees and closing time.
Drawbacks:
1. Shorter final maturity. Large balloons create significant renewal and refinancing risk.
2. Size limit. Public offerings can theoretically handle unlimited amounts, but for most banks, $60 million to $80 million is the upper limit, depending on several factors such as a hospital's credit quality.
3. Additional requirements. Banks might attach extra strings, such as treasury, cash management, deposit and trust accounts, which add other business fees.
4. Tax risk. Direct placements have certain language that could increase the coupon if the tax-exempt interest became taxable due to changes in the tax code.
5. Material adverse changes language. This language gives banks a way to call the bonds if a change materially and negatively affects the business or operations of the borrower, which doesn't exist for publicly-sold bonds.
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