Within the financial sector, few topics are hotter right now than the manipulation of the London Interbank Offered Rate, or Libor.
Libor, essentially, is the average benchmark for different interest rates for which a major bank could borrow funds from another bank. The British Bankers' Association publishes the rates daily — a lower interest rate indicates the banks are financially strong, while high interest rates suggest banks are having financial difficulties.
Barclays, one of the largest banks in the world, was recently fined more than $450 million for submitting false Libor rates, and several other banks are facing similar investigations as to whether they rigged Libor rates.
Libor is the benchmark for trillions of dollars of loans and securities, including those held by U.S. hospitals and municipal borrowers. Pierre Bogacz, managing director and co-founder of HFA Partners, a healthcare capital market advisory firm, offers his thoughts on how the recent Libor scandal is shaking out and what it means for hospital executive teams.
Question: Can you explain the Libor situation in a little more detail? Who was involved, and what are the ramifications?
Pierre Bogacz: Libor is an indication of how much banks pay to borrow from each other. According to regulators, Barclays and other banks colluded to keep these Libor rates artificially low, which boosted trading profits.
The interesting thing is the BBA calculates Libor by using submissions from 16 banks [and their figures]. It tosses out the four lowest rates and the four highest rates. They do this in case there are artificially low submissions — [the extremes] will get tossed out. So to work best, a manipulation would take more than a couple banks.
Q: So what does this mean for hospitals? How does this situation impact hospitals with Libor-based loans and investments?
PB: It depends on their balance sheet and whether they have Libor-based swaps or loans. If hospitals had Libor-based loans, they would have paid less than what they should have. The hospital, realistically, saved money if there was any type of price fixing.
But hospitals and municipal borrowers have also done a lot of swaps and should be concerned about pay-fixed swaps and basis swaps. With pay-fixed swaps, the hospital received a percentage of the Libor rate and paid a fixed rate in return. These swaps were put in place to lock in rates when a variable rate bond issue was done. If Libor was kept artificially low, the Libor-based payment a hospital received should have been higher.
Q: Should hospitals be worried that they may owe more in interest rates because they were paying artificially lowered rates?
PB: In the grand scheme of things, having to worry about a rebate is low on the list. The bigger challenge is how do you calculate this stuff? How do you quantify what the Libor should've been? There is no formula. By definition, it's based on what [the 16] banks submit. There is no way to approximate Libor. You can't go back to 2005 through 2010 and say, "Libor should've been this." You can't do that.
Q: If you are a hospital CEO or CFO, how do you react to this Libor controversy? Are there any steps that can actually be taken?
PB: Given how much scrutiny there is, I don't think there's much of a concern that Libor may be manipulated going forward, so I wouldn't get out of a pay-fixed swap because of concerns about Libor fixing. That would not be a good idea. Most pay-fixed swaps are under water. It's the worst possible time to get out of them.
The problem is how do you quantify a loss for any one hospital? They'd have to know what the Libor rates should have been, but swap experts are quick to point out that nobody can put finger on this and nobody could possibly know.
For the average hospital: Watch what's going on, but there is nothing I recommend they do going forward. If there was a loss, it's behind them. If it was manipulated, that's not right, and [municipal borrowers] have every right to go after culprits. But realistically, not much can be done now.
Libor, essentially, is the average benchmark for different interest rates for which a major bank could borrow funds from another bank. The British Bankers' Association publishes the rates daily — a lower interest rate indicates the banks are financially strong, while high interest rates suggest banks are having financial difficulties.
Barclays, one of the largest banks in the world, was recently fined more than $450 million for submitting false Libor rates, and several other banks are facing similar investigations as to whether they rigged Libor rates.Libor is the benchmark for trillions of dollars of loans and securities, including those held by U.S. hospitals and municipal borrowers. Pierre Bogacz, managing director and co-founder of HFA Partners, a healthcare capital market advisory firm, offers his thoughts on how the recent Libor scandal is shaking out and what it means for hospital executive teams.
Question: Can you explain the Libor situation in a little more detail? Who was involved, and what are the ramifications?
Pierre Bogacz: Libor is an indication of how much banks pay to borrow from each other. According to regulators, Barclays and other banks colluded to keep these Libor rates artificially low, which boosted trading profits.
The interesting thing is the BBA calculates Libor by using submissions from 16 banks [and their figures]. It tosses out the four lowest rates and the four highest rates. They do this in case there are artificially low submissions — [the extremes] will get tossed out. So to work best, a manipulation would take more than a couple banks.
Q: So what does this mean for hospitals? How does this situation impact hospitals with Libor-based loans and investments?
PB: It depends on their balance sheet and whether they have Libor-based swaps or loans. If hospitals had Libor-based loans, they would have paid less than what they should have. The hospital, realistically, saved money if there was any type of price fixing.
But hospitals and municipal borrowers have also done a lot of swaps and should be concerned about pay-fixed swaps and basis swaps. With pay-fixed swaps, the hospital received a percentage of the Libor rate and paid a fixed rate in return. These swaps were put in place to lock in rates when a variable rate bond issue was done. If Libor was kept artificially low, the Libor-based payment a hospital received should have been higher.
Q: Should hospitals be worried that they may owe more in interest rates because they were paying artificially lowered rates?
PB: In the grand scheme of things, having to worry about a rebate is low on the list. The bigger challenge is how do you calculate this stuff? How do you quantify what the Libor should've been? There is no formula. By definition, it's based on what [the 16] banks submit. There is no way to approximate Libor. You can't go back to 2005 through 2010 and say, "Libor should've been this." You can't do that.
Q: If you are a hospital CEO or CFO, how do you react to this Libor controversy? Are there any steps that can actually be taken?
PB: Given how much scrutiny there is, I don't think there's much of a concern that Libor may be manipulated going forward, so I wouldn't get out of a pay-fixed swap because of concerns about Libor fixing. That would not be a good idea. Most pay-fixed swaps are under water. It's the worst possible time to get out of them.
The problem is how do you quantify a loss for any one hospital? They'd have to know what the Libor rates should have been, but swap experts are quick to point out that nobody can put finger on this and nobody could possibly know.
For the average hospital: Watch what's going on, but there is nothing I recommend they do going forward. If there was a loss, it's behind them. If it was manipulated, that's not right, and [municipal borrowers] have every right to go after culprits. But realistically, not much can be done now.
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