The 2008 auction rate securities market collapse and US nonprofit health systems

This paper examines the 2008 collapse of the US tax‐exempt auction rate securities (ARS) market, from the perspective of not‐for‐profit auction rate debt issuers.

The authors use a multiple case study methodology to examine the financial and operating impact of ARS auction failures on three US nonprofit hospitals and health systems. The analysis is based solely on information drawn from publicly‐available documents.

The three case study subjects issued more than $ 411 million in ARS. These securities were issued with bond insurance and fixed payer interest rate derivatives. The 2008 global financial crisis resulted in millions of dollars in drastically increased interest costs, costly debt refunding, and derivative‐related collateral postings. It was also found that the ability of an individual ARS issuer to respond effectively to these capital market‐related shocks is related to three key factors – profitability, liquidity and perceived credit quality.

The reliance on a case study methodology may limit the authors' ability to generalize the findings to the hundreds of other US non‐profit ARS issuers.

Nonprofit financial executives must learn to adequately assess their organization's risk exposures if innovative long‐term capital financing instruments are to be used in the future. These potential costs, as well as any ineffectively hedged interest cost exposure, must be considered and weighed against any potential interest cost saving associated with any future debt financing arrangements.

The paper measures the financial and operating impact of the highly publicized 2008 ARS market collapse on non‐profit ARS issuers.