Interest Rate Benchmarks Are Changing: Why Health Care Boards Should Care
This article was originally published by The Governance Institute
LIBOR, which is the benchmark used in many loans, bonds, and other financial instruments (including derivatives), is scheduled to be phased out shortly. This dramatically impacts both existing financings and new financings, though the impact of this transition on companies is being minimized by banks, and not fully understood by many lawyers, financial advisors, and board members.
This transition has significant financial and legal implications for any company, but especially for hospitals and health systems since they generally have inordinate exposures to LIBOR-based instruments through variable-rate loans and interest rate swaps.
Banks are telling healthcare providers that the LIBOR transition is being implemented through standard bank form documents, likely through day-to-day financial management with possibly no internal or external financial or legal guidance or board involvement. The reason for this lack of involvement is that, for existing financings, there is no new financing requiring counsel/advisor review and board approval, even if there may be substantial additional liabilities associated with the LIBOR transition. For new financings, there is typically no appreciation of the potential magnitude of this seemingly innocuous benchmark change.
Our experience is that these form documents are onerous on borrowers and, in essence, let the banks determine the new interest rates for healthcare organizations. By way of example, a 30 basis point interest rate differential between LIBOR and the new transition rate for a 10-year $100 million loan/bond/swap could cost a hospital or health system an aggregate of $3 million. Unplanned changes of this magnitude could add substantial risks to any organization, and is the reason for guidance from regulators including the Securities and Exchange Commission (SEC) and the Municipal Securities Rulemaking Board (MSRB), among others. Importantly, other than for a retail customer, a bank may not be legally required to look out for the best interests of their client (i.e., your organization). This may also be true of certain law firms and financial advisors who could have undisclosed conflicts of interest as they may also represent your bank, even on your own transaction.
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