A deal between a Brockton health care group and four community banks is the latest example of what some are calling a shift away from the public bond market in favor of more traditional bank financing.

It all started when the management team at Signature Healthcare Corp., a Brockton-based nonprofit that owns the Brockton Hospital and Signature Medical Group, decided it should refinance some of its long-term public bond debt.

Rockland Trust committed $35 million of a $60 million refinancing package. Mutual Bank in Whitman, HarborOne Bank in Brockton and Cambridge Savings Bank joined Rockland Trust on the deal.

Gerard Nadeau, Rockland’s head of commercial lending, said that a significant portion of the package consists of a tax-exempt bond held by the banks and secured by properties the hospital owns.

While he could share only select details about the rest of the deal, he described it as “a combination of turn debt and revolving credit. It has both fixed and floating interest rates, and it’s both long-term and short-term.”

Industry professionals say this type of activity has been on the rise since the financial crisis of 2007–08. Institutions like hospitals or universities with publicly placed bond debt have begun to either refinance that with a private bank loan, or seek out bank debt as an alternative in the first place.

Market Forces Collide

Christine Doyle, a managing director at Public Financial Management (PFM) who also consulted with Signature on the deal, focused particularly on variable-rate demand bonds (VRDBs), a credit instrument with roots in the 1980s that today is popular with institutions like hospitals and universities as a way to access relatively low cost debt. Those bonds, sold on the public market, tend to be held by tax-exempt money market funds, though they have waned in popularity in recent years.

Two particular forces drove this trend, she said.

First, in order to access that market, the institution in question has to obtain a letter of credit from a bank, which charges a fee based on the institution’s own credit rating. After the financial crisis, those institutions using this bank credit enhancement experienced bank rating downgrades, resulting in the need for the institutions to seek alternative financing mechanisms that did not rely on banks’ ratings. Hence one of the key differences between the public bond debt and the private bank debt.

“From that point of view, the institution is dependent on the bank maintaining a strong credit rating, whereas in a private bank loan, it’s just a private loan. The rating of the bank doesn’t matter, as long as the borrower is fulfilling their obligations relative to payments or covenants,” Doyle said.

Around the same time, Basel III required banks to fully reserve against those letters of credit – and simply put, the loan is a better deal for the bank.

The public market, of course, is still attractive in some circumstances, especially when it comes to fixed rate debt, Doyle said.

“I will say that when PFM advises on a fixed-rate private bank loan as compared to a fixed-rate public bond issue, it’s harder for the bank loan to look compelling as compared to a public issue of debt. The fixed rate public tax-exempt market is still very low cost and very compelling,” she said.

Helping A Partner

But in the variable-rate market, more traditional bank financing appears to be edging out public bond financing. Not that bond financing is going the way of the dinosaur, by any means. In fiscal year 2014, MassDevelopment, which issued the original bond debt that Signature sought to refinance, issued 94 bonds totaling $2.8 billion. The year before that, it issued 99 bonds totaling $2.3 billion. A majority of those bonds, however, are issued to the private market and often sold to banks anyway.

Still, Nadeau said, “There’s no question we have already seen other institutions seeking similar financing. … I would say it’s a clear movement away from the public placement of tax exempt bond debt.”

But he added, “This isn’t us trying to build a niche so much as helping a local community partner.”

Nadeau characterized Rockland Trust’s initial relationship with Signature Healthcare as “non-credit” in nature. Besides supporting the organization through the bank’s charitable arm, board members from both organizations have made friendly acquaintances over the years.

He said, “It was nice to see community banks showing their faith in the importance of Signature Healthcare to the local community.”

Email: lalix@thewarrengroup.com