S&P recently published Q&A’s on “alternative financings” such as bank placements. Placements can have a significant impact on a borrower’s overall credit picture, and failure to provide information may lead to a rating downgrade or even withdrawal.

Alternative debt includes bank loans, direct purchase bonds, and other types of debt sold to a single buyer, generally a bank.

This type of debt has become wildly popular with not-for-profit hospitals looking to replace variable-rate demand bonds and avoid the aggravation of selling bonds in the public debt markets.

Bank placements totaled $19 billion in 2013, more than 6 times 2010 volumes.

Hospitals are voracious consumers of bank placements, which have no official statement or other public disclosure requirements and can be implemented quickly without bond underwriters.

This is not the first time S&P speaks on the topic of alternative debt.

Back in May 2011, we reported that S&P warned borrowers about the risks lurking in bank placements and how more information will be required on these financings in the future.

Although bank placements are usually not rated, they can have a major impact on a borrower’s entire debt structure.

Placements often contain an acceleration clause; in an event of default, this can affect liquidity and the borrower’s ability to service any other debt.

S&P looks at how much liquidity a borrower has in immediately available funds to cover acceleration scenarios.

In its March 2014 paper, the agency went one step further and outlined the consequences for borrowers who continue to ignore the agency’s request for more information on direct placements.

Borrowers who fail to respond to S&P within 15 days will receive a second request; a failure to respond to the second request within 10 days will trigger a CreditWatch with negative implications and a third request; the final step is a rating downgrade or withdrawal.

Posting bank documents on the MSRB’s EMMA website won’t cut it: S&P now requires the borrower to provide the information directly to them, preferably starting when the financing is in the planning stages.

This requirement is understandable given that searches on EMMA can be hit or miss and that many borrowers do not post their bank documents on EMMA.

Hospitals can take comfort in the fact that in its rating reports, the agency typically limits its discussion to key terms such as general covenants and acceleration clauses; rates and other information is kept confidential.

To avoid any surprises, it’s a good idea to discuss what will be mentioned by the analyst in their report before publication.

Hospitals with bank placements in the works are advised to keep S&P and other rating agencies in the loop and provide all necessary details as requested.

{phocadownload view=file|id=68|text=Download the Standard & Poor FAQ paper (265KB)|target=s}.