| Derivatives Advisory |  |
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First River Advisory has advised clients in connection with the origination, restructuring and termination of interest rate swaps since 2005, including the following transactions, all of which were closely coordinated with the issuance of debt instruments:
- "rate-lock" swaps for Oaklawn Hospital and Marquette General Hospital in 2005 implemented in anticipation of bond issuances in 2006;
- a long-term fixed-payer interest rate swap to complement Oaklawn Hospital's 2006 issuance of auction-rate securities and subsequent work-out upon the default of this swap's counterparty;
- a long-term fixed-payer interest rate swap to complement Marquette General Hospital's issuance of auction-rate securities in 2006;
- a replacement for Oaklawn Hospital's defaulted swap and its subsequent restructuring to align more closely with its associated debt instruments once market conditions had improved;
- two new long-term fixed-payer interest rate swaps to complement Oaklawn Hospital's Series 2010 Bonds and 2010 Term Loan;
- a long-term fixed-payer interest rate swap to complement Hillsdale Hospital's Series 2011 Bonds;
- the early termination of Oaklawn Hospital's three interest rate swaps in connection with the issuance of its Series 2016 Bonds; and
- continual monitoring of the credit quality of Flagler Hospital's swap counterparty since the 2008 fiscal crisis and the eventual early termination of this swap in connection with the refunding of Flagler's Series 2010B Bonds by its Series 2017B Bonds.
INNOVATIVE SWAP FEATURES THAT BENEFIT CLIENTS
First River Advisory began to recommend to some clients the embedding of "Bermuda" early termination options in 2008. In general, the dates of these "Bermuda" early termination
options were set to coincide with mandatory tender dates of bonds directly purchased by banks or with banks' term loan maturities. When such clients opted to refund these variable-rate debt instruments with new
debt instruments featuring natural fixed rates, they exercised their options to terminate their swaps at par or at a nominal premium contemporaneous with the refunding. Having these "Bermuda" early termination
options became especially important in cases where clients’ banks declined to renew their credit facilities, a situation which applied to Oaklawn Hospital in 2016. These "Bermuda" early termination options
have the added benefit of reducing the fluctuations in mark-to-market valuations.
Hillsdale Hospital entered into its swap with the same bank which directly purchased its Series 2011 Bonds. The bank had its customary right of set-off which would have enabled it to invade the Hospital's deposit
accounts to recover shortfalls in debt service payments on the Series 2011 Bonds. First River Advisory negotiated the Hospital's right to set-off its debt service payments in
the event that the bank, as swap counterparty, defaulted in its obligations under the swap.
Ever since the 2008 fiscal crisis, First River Advisory began to monitor the credit quality of its clients' swap counterparties. Oaklawn Hospital's concerns regarding the
deteriorating credit quality of one of its swap counterparties was a key consideration in its adoption of a financing plan in 2016 which featured the termination of all of its swaps.
