HUGE Asset-backed security blow up underway, affecting PIMPCO, Alliance and Bank ONE. Tuesday's WSJ is an absolute must read for bears, this is MAJOR in terms of the credit bubble going KaBoom!<NFG>
online.wsj.com
Investors Face Potential Losses
Tied to National Century Crisis
By GREGORY ZUCKERMAN and PAUL BECKETT
Staff Reporters of THE WALL STREET JOURNAL
A battle intensified between dozens of health-care providers and one of the country's biggest medical financial firms, even as fallout from the company's problems left bond investors facing potentially significant losses.
Some of the biggest investors and traders in the bond world -- including hedge funds and the powerhouse Pacific Investment Management Co., or Pimco -- could face losses as a result of their holdings of $3.3 billion of bonds issued by subsidiaries of National Century Financial Enterprises Inc. The closely held Dublin, Ohio, company last week stopped making payments to about 60 hospitals and health-care providers around the country after diverting money that was meant to support its bonds.
While the financial crisis caused by National Century's woes remains fluid, the episode is one of the biggest black eyes in years for the booming $1.4 trillion asset-backed securities market, and raises questions about this unorthodox slice of the market, in which companies sell bonds backed by things such as credit-card and car-loan payments.
On Monday, bondholders were busy figuring out how much exposure they have, and what the chances are for recovery from the bonds. Pimco, for example, which manages $300 billion in assets, owns about $250 million of asset-backed bonds from National Century, said people familiar with the situation, while Alliance Capital Management owns around $200 million of the bonds.
Highland Financial Group, a $460 million New York hedge fund that holds $44 million of these asset-backed bonds, has told investors that its returns would drop 9.5% if the NCFE bonds prove worthless. A representative of Highland said the firm has other gains in its portfolio that may offset any National Century losses.
While the entire picture of what happened at National Century isn't clear, it has bondholders facing potential losses. Behind the problems for bondholders: word that National Century instructed Bank One Corp., the trustee for one of its big bond deals, to reassign about $300 million in cash reserves that were intended to protect bondholders and allowed the bonds to gain a high investment-grade rating. Bonds issued in the $2.1 billion deal, known as NPF XII, were supported by health-care claims that National Century purchased from hospitals and health-care providers. Many of those claims come from Medicare and Medicaid and when they are paid by the government, the money is used to service the bonds.
Representatives of Bank One, Pimco and Alliance declined to comment.
Meanwhile, health-care providers that haven't received money owed by National Century for the claims they have sold to the company continued to criticize National Century for leaving them strapped for cash. Because they didn't receive money last week, several dipped into their own reserves to meet their payrolls. And some turned to the Centers for Medicare and Medicaid Services, which administers the two government programs, for help. They say the government division, which is part of the Department of Health and Human Services, agreed to send reimbursements of pending claims directly to the providers without giving access to National Century.
But lawyers for NPF XII went to state court in Ohio on Monday and obtained a temporary restraining order against 68 health-care providers to prevent them from bypassing National Century.
At least one health-care provider said that legal hardball was putting patients at risk.
"Without an orderly transition, they are forcing potential patient abandonment," said an official at Tender Loving Care Services Inc. of Lake Success, N.Y. The home-care company, which is a unit of Med Diversified Inc., of Andover, Mass., serves about 60,000 patients in their homes with nursing services including such programs as insulin injections. "National Century Financial Enterprises and the trustees of NPF XII are jeopardizing lives of patients and the livelihoods of thousands of nurses," the official said, because there is a chance that nurses would stop working if they aren't paid this week.
How much might investors lose from National Century problems? It all depends on how many of the medical bills that back the bonds will be paid off.
If the bills continue to be paid by Medicare, Medicaid and other organizations, then investors should do fine.
But National Century is responsible for helping the medical establishments collect on the bills, and some investors fear the company's troubles will make it harder for all the collections to be made. Others fear the quality of the receivables may not have been as high as investors were led to believe.
And unlike some other asset-backed deals, such as credit-card or auto loans, medical bills are somewhat harder to plan for because of the complexities of the insurance business and the fact that there are fewer companies with experience collecting these bills.
And because at least one of the cash reserves backing the bond deals has been used by the company, and is no longer available to bond investors, it raises questions about how bondholders will make out.
Credit Suisse First Boston underwrote most of National Century's asset-backed deals.
The asset-backed bond market has been something of a haven to lower-rated companies eager to raise cash in the past several years.
Corporate-bond investors have turned skittish about buying debt of these companies, and banks are proving to be reluctant lenders.
As a result, many companies have turned to the asset-backed bond market, pledging assets such as expected payments on credit cards and even mobile homes, and receiving funding at more attractive levels. Others in niche businesses, such as National Century, likely wouldn't have been able to raise financing from the corporate-bond market.
The prospective losses underscore some of the dangers in segments of the asset-backed bond market, which has soared from $400 million to $1.4 trillion in just six years. Other parts of the market, such as credit-card and auto loans, trade on a regular basis, giving investors an up-to-date valuation of the bonds. But bonds backed by health-care receivables, such as those of National Century, trade less frequently, making them illiquid and harder to value. And about one-quarter of the asset-backed market is not directly supervised by securities regulators, though it is highly scrutinized by rating agencies and others.
Hospitals and health-care companies that depend on National Century to help manage their cash flow said they are coping with an interruption in payments from the firm by drawing on reserves and by asking insurance companies to pay them directly.
Benjamin Peak, chief executive of Dickenson County Medical Center in Clintwood, Va., became alarmed on Oct. 25, when the 50-bed community hospital transmitted its list of account receivables, as usual, to National Century -- but no funds came back in return. With payroll due, he said, the hospital was forced to draw on its reserves to pay employees and vendors.
After the missed payment, telephone calls to National Century from the hospital and from its corporate parent, Rx Medical Services Corp. in Fort Lauderdale, Fla., turned up no clear explanation for the problem, Mr. Peak said. As a result, the hospital has instructed government and private health insurers to begin forwarding payments directly to the hospital, instead of to a "lockbox" set up to forward payments to National Century.
While he declined to discuss specific dollar amounts, Mr. Peak estimates payments under the arrangement with NCFE covered as much as 80% of the hospital's operating expenses. "In this environment, you cannot wait that long for your money," he said.
National Century is run by Lance K. Poulsen, a big Republican supporter in Florida who, according to local news reports, provided Florida Gov. Jeb Bush with the use of a National Century corporate jet for an in-state trip in September. National Century spokesman Jim Nickell said the company was reimbursed for the trip by Gov. Bush's campaign, which a spokesman for the governor's campaign confirmed.
Also on its six-member board are Hal Pote and Tom Mendell, two executives from J.P. Morgan Chase & Co. J.P. Morgan's involvement in the company stems from the bank's 2000 purchase of the Beacon Group, an investment-banking boutique. One of Beacon's funds, which wasn't included in the sale of Beacon to the bank, owns a 16% stake in National Century.
People familiar with the matter say J.P. Morgan's executives who sit on National Century's board were given no inkling by the company's management that problems were brewing. A J.P. Morgan spokeswoman declined to comment.
Pharos Capital Group, a Dallas-based private-equity firm, also invested an undisclosed amount in National Century within the past few months, people familiar with the matter say. Officials at Pharos didn't return calls for comment. |
