By Mathew Keller
Regulatory and Policy Nursing Specialist
and Jordan Ash
We’ve seen that Allina is taking on more and more debt, $880 million in all. We’ve seen who benefits from that debt (hint: look to the Board). Today, we look into a particularly bad deal Allina made with UBS Securities and another big bank; a deal that led to losses in the tens of millions, a lawsuit; and the intervention of Minneapolis and Saint Paul.
Auction rate securities (ARS). They were popular back before the financial crisis, and the big banks loved them. Like most of the financial instruments that tanked in the recent recession, though, they’re completely made up. Here’s how they work.
Minnesotans for a Fair Economy
In 2007 Allina issued $125 million in ARS bonds underwritten by two big banks. These bonds carried an interest rate that reset at weekly or monthly auctions. At each auction, investors bid the lowest rate they would need to receive in order to buy the bonds, and the interest rate on the bonds reset to the lowest rate that was bid. Banks collected exorbitant fees for conducting these auctions. If no investors submitted bids at the auction, then the bond issuer had to pay the agreed maximum rate on the bonds.
That’s exactly what happened with $125 million dollars in bonds Allina offered in 2007. It offered the bonds, the market failed, no investors were submitting bids, and all the sudden Allina was paying 15 percent interest to the big banks that both underwrote AND served as broker-dealers to the transactions. As a result, Allina had to refinance the bonds, pay termination fees, and pay compensation to new underwriters. And who would’ve guessed that the cities of Minneapolis and St. Paul were backing the bonds too? Well, they also had to get involved.
The total cost? We may never know. We do know that Allina lost $14 million in 2008 and 2009 due to a feature in the ARS bonds known as an interest rate swap. We can also account for one termination fee on Allina’s bad deal, of $12.6 million dollars (paid with a 2009 bond offering). We also know that Allina sued UBS, one of the broker-dealers and underwriters on the transaction, for “many millions” in lost healthcare dollars.
And yet, Allina continues to lose money on interest rate swaps today. In fact, it’s lost over $60 million in the past two years alone on these deals.
The most interesting thing about Allina’s bad 2007 deal, though, is that Allina never sued the other big bank that served as an underwriter and broker-dealer on the transaction: Piper Jaffray.
So, when you put everything together, it looks a little like this: Allina wants to come up with some extra cash to buy other companies. It gets the cities of Minneapolis and St. Paul to back a bond offering. It gets a huge player on its Board of Directors, Piper Jaffray, involved with UBS as underwriters and broker-dealers advising on the transaction. It offers the bonds. Allina, a billion-dollar healthcare system with seven investment bankers/financial professionals on its Board of Directors, many lawyers, many accountants, and a CFO who manages over a billion dollars, is somehow hoodwinked by one of its broker-dealers/underwriters but not the other—the one who happens to be on Allina’s Board. It loses “many millions.” It continues to lose many millions, $60m in the past two years.
Wait—is it Allina that’s losing the many millions? Or is it us?