WPAHS should disclose more, investors complain
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A dispute between West Penn Allegheny Health System and investors who hold the troubled hospital system's $737 million in outstanding bond debt highlights what has long been a sore point among investors: how little organizations that issue municipal bonds are required to disclose compared to the wealth of information that investors receive about corporate stocks and bonds.
A case in point: Pittsburgh insurer Highmark told West Penn officials Aug. 30 that it wanted the hospital system to file for bankruptcy before the insurer completed its $1.4 billion takeover of the region's second-largest health system. West Penn did not notify bondholders of the demand until a month later, when the hospital announced it was breaking off talks with Highmark.
"Investors in this marketplace have been imploring the [Securities and Exchange Commission] for years to require more disclosure," said Ann-Ellen Hornidge, a partner at Mintz Levin, a Boston law firm that advises municipal bond investors.
Governments use municipal bonds to build roads, schools and other facilities. They also allow hospitals and other organizations to issue municipal bonds without putting taxpayers on the hook for repaying the debt.
West Penn Allegheny issued $752 million in bonds through the Allegheny County Hospital Development Authority in 2007, when credit was easier to obtain for struggling companies. The bonds refinanced debt the hospital took on in 2001, when it had to agree to more onerous terms in order to borrow money.
Municipal bonds appeal to investors because of their tax-free advantages. But one of the trade-offs is that bond issuers are not required to provide the kind of detailed information companies that issue stocks or bonds are required to reveal.
Investors say municipal bond issuers have been getting better about disclosure. A major improvement came in 2009, when the industry group authorized by Congress to police the municipal bond market established an online system allowing investors to view financial and other information provided by bond issuers.
But a U.S. Government Accountability Office report issued in July said investors who hold the $3.7 trillion in municipal bonds currently outstanding -- more than half of them retail investors -- still have major complaints about the timeliness, frequency and completeness of the information they receive.
The GAO found that investors who purchase bonds issued by a small municipality or school district wait an average of 244 days after the end of the organization's fiscal year to get financial statements for that year.
"It's over a year before we get information on some of the smaller issuers," said Michael Griffin, head of municipal credit research for Vanguard, a Valley Forge investment company.
Mr. Griffin said many bond issuers have improved, but the lack of disclosure remains "a substantial issue."
"When you lend an issuer a large amount of money, you would like to know what's going on. You want some heads up on what's happening and what they're doing about it," he said.
Concerns about intruding on the rights of state and local governments have stopped Congress from requiring municipal bond issuers to provide the same level of detail that publicly traded companies that issue stocks and bonds are required to supply.
Unlike the corporate securities, municipal bond issuers do not have to register bonds with the SEC before offering them. And while they agree to disclose material events and other types of information once bonds are sold, there is little recourse for investors if issuers do not keep those promises.
William Delahunty, director of municipal bond research for Eaton Vance, a Boston investment company, said more governments, hospitals and other issuers have gotten better about providing detailed and timely disclosure, but the quality of information varies. Some companies provide 50-page reports on their finances, while others provide four-page reports.
How much information an issuer provides and how often is one factor Mr. Delahunty uses in selecting bonds for Eaton Vance's clients. He said that's why the company never invested in West Penn Allegheny's bonds.
"I would call management and never get a call back," Mr. Delahunty said.
As for the month that lapsed between Highmark telling West Penn Allegheny that it wanted the hospital system to file bankruptcy and the WPAHS notifying its investors about that development, "that just speaks to part of the reason why we never bought the bond," he said.
The delay in providing the information would appear to be only part of the concern for West Penn Allegheny's bondholders, said Ms. Hornidge. She said what makes matters worse is that the hospital system claimed it broke up the marriage with Highmark to protect West Penn's stakeholders, including bondholders.
"Although I am not directly involved in this case, that explanation doesn't ring true to me," she said. "West Penn's stated concern for the bondholders is not consistent with what I understand to be their repeated unwillingness to allow bondholder representatives a seat at the table in these discussions."
West Penn Allegheny spokesman Dan Laurent said the hospital system "fully complied with appropriate obligations to its security holders." Investors were notified as soon as West Penn Allegheny's board determined that it was in the hospital's best interest to walk away from Highmark, he said.
The trustee representing West Penn Allegheny's bondholders, UMB Financial of Kansas City, Mo., declined comment.
Highmark has indicated it wants to slash $600 million off West Penn Allegheny's $1.4 billion price tag. Much of the savings would come from getting bondholders to accept less than the $737 million they were owed as of June 2011 and by getting the federal Pension Benefit Guaranty Corp. to assume the hospital system's pension obligations.
This summer, the SEC said it would ask Congress for the authority to establish standard reporting requirements for municipal bonds.
Ms. Hornidge said: "Situations like West Penn underscore the need for greater transparency in the municipal bond market."
First Published October 19, 2012 12:01 am