Credit Crunch Hitting Nonprofits with Variable Rate Bonds

The Boston Globe reports that a number of nonprofits, particularly hospitals and universities, are facing the possibility of having to pay significantly higher interest rates on their outstanding variable rate bonds because of automatic rate resets when no one bids on their bonds at rate setting auctions.  The article lists various Massachusetts nonprofits as examples, including Brandeis and Tufts universities, the parent of Beth Israel Deaconess Medical Center, and Southcoast Hospitals Group in New Bedford.  Several members of Congress, concerned about these nonprofits as well as government agencies facing the same problem, are asking the SEC to allow affected nonprofits and agencies to bid on their own bonds without creating a risk that the SEC will view such bidding as improper market manipulation.  Absent the ability to make such bids, many nonprofits and government agencies with variable rate bonds may interest rates on these bonds of up to 20 percent.

According to an earlier Bond Buyer article, the concern about adverse SEC action arises from a 2006 $13 million settlement and cease-and-desist order that came out of alleged market manipulation practices the SEC maintained violated federal securities laws.  Absent reassurance the SEC would not view bids by nonprofits and government agencies on their own bonds as involving similarly prohibited market manipulation, broker-dealers are refusing to accept such bids.  Statements by SEC officials quoted in the article indicate the SEC remains at best undecided regarding whether to provide such reassurances, however.  This ambivalence on the part of the SEC may explain why members of Congress are now making direct appeals to the SEC on this issue, as reported in the Boston Globe article.

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