The default of GZO Spital Wetzikon continues to preoccupy the Swiss bond market. Notably, this is the first time since Swissair that a domestic debtor has failed to repay its bonds on time.

The issue also appears to be of some concern for the Zurich State Institute - the cantons in this country are responsible for providing healthcare to the population and thus for the hospital system. At the end of last week, Credit Research at Zürcher Kantonalbank (ZKB) published a 75-page analysis of the 15 hospitals represented on the bond market, which also sheds light on the events surrounding Wetzikon Hospital.

Market for hospital debtors remains open

On the positive side, the market for hospitals has remained open. This year, after the Zurich cantonal government rejected the request for financial support from the Zurich Oberland Health Organization (GZO) on 4 April, three such debtors issued new bonds. However, they were obliged to offer investors slightly higher risk premiums.

Public or state-affiliated hospitals (ZKB also covers a private group with Hirslanden) have been raising funds on the market for a good ten years and currently have outstanding bonds worth CHF 4.3 billion. This corresponds to less than one percent of the domestic market.

The ZKB fallacy

ZKB creditworthiness specialist and study author Patrick Hasenböhler also comments on the Wetzikon hospital case. He does not skimp on the history and also reveals his own misjudgements. At the beginning of 2023, a new ownership strategy came into force that allows third parties to acquire a stake of up to 49% in GZO AG.

“As the hospital, in contrast to neighboring Spital Uster, has made no public effort to apply to the twelve owner municipalities for a capital increase, we assumed from the management's communication in this regard that the entry of a new strategic equity investor and a debt financing strategy would be presented at the same time. But that was a fallacy,” says Hasenböhler, looking back.

Backing the wrong horse

Following the failure of negotiations with potential investors, the GZO relied entirely on financial support from the Canton of Zurich, with the well-known result. According to Hasenböhler, one reason for the failure of negotiations with private investors was probably that Spital 2023 had also come under severe operational pressure, partly because it was unable to pass on higher costs to customers, or only with a delay, which is a problem for the entire industry.

In addition to the bond of CHF 170 million, GZO has further financial liabilities of CHF 60 million outstanding. The debtor is currently protected from access by creditors because it is in provisional debt-restructuring moratorium until the end of the year. A haircut for the bondholders, i.e. a partial debt waiver, is also being discussed. The bondholder group GZO Creditor Group, which reappeared a few days ago, is opposed to this; the bondholders will vote on their proposals at their meeting on October 25.

Sensible bundling of creditor interests

The author also comments on this development: “The attempt to bundle the interests of the creditors is to be welcomed from their point of view. It seems likely that the proposals will be supported by a larger group of bondholders. It will undoubtedly be more difficult to obtain the necessary support from the municipalities with these proposals.”

Consequently, repaying the bond will be challenging without a substantial contribution from the twelve shareholder municipalities. The hospital, the municipalities and the creditors must therefore reach an agreement. “It remains to be seen whether refinancing without a haircut is politically feasible,” says the ZKB credit specialist, who is apparently rather non-commital on this point.

Difficult and lengthy process

According to the ZKB, an additional complication arises from the fact that the general contractor responsible for the new building, Steiner, which is itself in provisional debt-restructuring moratorium, is now demanding compensation of CHF 340 million instead of CHF 225 million, according to the GZO.

Hasenböhler also remains vague about the GZO Creditor Group's statement that in the event of liquidation and thus realization of GZO's assets, creditors would receive back the full nominal value of their bonds. However, he points out that most of the hospital's property is located in the zone for public buildings, which restricts the possible uses. “If rezoning is possible at all, we believe the process would be difficult and, above all, lengthy.”

GZO: debt haircut is an element of the restructuring concept

Not only the bondholder group and ZKB have spoken out in recent days, but also the defaulting debtor itself. In a fact sheet dated 28 August, the GZO emphasized that the income from hospital operations would not be sufficient to cover the interest expenses and repay the debt, even if business was good. “Without a far-reaching restructuring of the balance sheet, GZO AG will not be able to survive.”

According to GZO, work on a restructuring concept is currently in full swing. “The complexity is extremely high due to the large number of stakeholders, mutual dependencies, political processes in the shareholder communities, the new building situation, the super-provisionally registered building contractor's liens and the positioning of the hospital in the future hospital environment.”

Detailed information on October 25

The bondholders will not only be able to vote on the creditor group's proposals at the meeting on October 25, but will also be provided with detailed information about the restructuring concept by the GZO. This will contain three elements: Capital subsidy by the municipalities, debt haircut and securing financing for the new building.

Experience has shown that dealing with defaults on the Swiss bond market is also highly complex - or, in the words of ZKB, “difficult and protracted.” Unfortunately, from today's perspective, there is much to suggest that the case of Wetzikon Hospital will confirm this rule.