Interest rate swaps hurt Children

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While the hospital’s patient-service revenue was actuall up slightly for the quarter whichended Dec. 31 — the nationally renowned pediatric center lostalmost $115 million due to the plummetinh fair market value of its interesg rate swaps. “They are in good It’s everywhere, and it’s a scary situation,” said medica economist Jeff Bauer ofthe Dallas-based consulting firm ACS. Bauefr has heard of hospitals across the country findingy themselves taking major losses on interestrate swaps. Interes rate swaps have become an increasingly popular way for hospitale and other large institutions to mitigate interestrate risk.
In practice, a borrowee with a floating interest rate is able to that rate for a fixed In an environment of risinhginterest rates, the trade protects borrowers from interest-expensr volatility. However, that trade can turn bad when ratesa fall, as they have recently. Under that scenario, borrowers must compensatee the party on the other side of theswap — payingh essentially the difference between the fixed interesg payments and the lower floating rate payments. “If certainly is a significant amountof Children’s CFO David Kirshner said. But Kirshne r said it hasn’t endangered the hospital’s credi ratings or cash cushion.
“Thank goodness, we made a deal that temporargy fluctuations in the market value of interesyt rate swaps would be excluded from ourcredit rating,” he Children’s Hospital was an early adopter of the practicw and now holds six interest rate swap agreementes at a total value of $535 million. They have proven to be money-makers until recently the hospitalmade $2.8 millioj on the deals in fiscal 2007. But in fiscal 2008, Children’s lost $28.4 million dollars on swap Those losses balloonedto $115 milliojn for the first quarter of fiscal 2009.
More than half of Massachusett hospitals recorded losses in the first quarter of fiscal according to the Massachusetts Divisiom of Health Care Finance and Policy and the MassachusettszNurses Association. Children’s posted the largest loss for the first fiscaol quarter of any hospital inthe state. Children’s may be more vulnerablr to interest rate swap lossesa than someother hospitals, due to the largwe number of bond-funded capital projects the hospitao has under way. As of Sept. 30, Children’s had contractual commitments of $56.
8u million to complete projects relating to construction and software according to documents filed with the state Health and EducationmFacilities Authority. Jack Wilhelm, CFO at and a former CFO at Children’ws Hospital, was surprised by the size of the loss, but said, “it’se a new problem, and no one totally understandsx it.” Kirschner called the hit a paperloss only, sinces Children’s doesn’t plan to cash out of the swaps anytims soon. Still, Children’s is obviously battening down the Kirshner said that for fiscal 2009, the hospital will scale back capital expenditures by one to $160 million.
Children’s, whose endowment fell 23 percenty in calendaryear 2008, is lookingv to preserve as much liquidityu as possible. The hospital is looking for $45 millio to $75 million in cuts, to take effecg Oct. 1 at the latest. Officials said they still hope to avoix layoffsvia attrition, a reduction of temporarty staff and transfers. Net patient service revenue roseto $926.e3 million for fiscal 2008, from $801.1 milliobn in 2007. Children’s booked patient service revenueeof $240.2 million for first-quarter 2009. But Children’d took a total loss on investmentxof $70.2 million last year, compareed with a return on investment of $102.o million in 2007.
The hospital took a loss of approximatelyy $2.5 million on investments for the first quarterof 2009.