Case Study

Caregroup HealthCare System

PFM was hired by CareGroup (Boston, MA) to evaluate a proposal to restructure approximately $180 million of existing "AAA" insured fixed rate bonds through a total return swap transaction. PFM performed a comprehensive analysis for both CareGroup's Board and management to illustrate the various risks and considerations for the proposed transaction.

A total return swap is a structure in which an investment banker tenders existing bonds in the open market and places the bonds into a Trust. Frequently the underlying Bonds carry "AAA" insurance, and the Trust issues variable rate debt backed by the "AAA" insurance. In return for paying the high coupon rate on the debt, the Trust pays a total return to the Institution, which represents the coupon less the funding cost and fees.

PFM illustrated the limitations and setbacks of the proposed transaction, including the inability to restructure principal for upfront savings, and the risk of the trust becoming under collateralized which could result in the requirement of cash collateral from CareGroup or termination of the Trust. Because of these factors, CareGroup was not comfortable with the proposed transaction, and decided to seek alternatives. PFM negotiated a deal with the existing credit enhancer to provide bond insurance for a synthetic refunding transaction issued through the Massachusetts Health and Educational Facilities Authority. The issue sold as auction rate bonds with three competitively bid swaps conducted by PFM. The resulting transaction yielded similar economics to that of a Trust Restructuring, without the additional risks. Additionally we were able to negotiate a more lenient debt-to-capitalization test than was required under the existing insurance covenants.

Currently PFM is working with CareGroup on an upcoming new money borrowing in evaluating various structuring alternatives, credit enhancement strategies, derivative alternatives, and reviewing proposed changes to CareGroup's existing bond documents.

PFM additionally works to administer CareGroup's $75 million variable rate pooled loan program. PFM prepares monthly billing reports for CareGroup's components breaking apart the pro-rated debt service, net swap, and ancillary fees.