The troubled health-care market, in which a new issuer seems to declare bankruptcy every day, is sparking investor and underwriter fears in a sector that at first blush seems far removed from health care's woes - commercial mortgage-backed securities.

In particular, because some CMBS are backed by properties owned by the defaulting health-care providers, investors are concerned that such defaults could have a detrimental impact on the CMBS market this year. So far, the rating agencies have affirmed their ratings on CMBS backed by the troubled health-care providers, but fears remain that downgrades are still possible.

It has not been a good month for health-care facilities. Last Thursday, Charter Behavioral Health Systems, the nation's largest psychiatric hospital chain, filed for Chapter 11 bankruptcy protection and said it would close 33 hospital facilities and lay off thousands. A week earlier, two major nursing home providers, Mariner Post Acute Network Inc. and Integrated Health Services Inc., filed for bankruptcy. And such decisions come a few months after similar bankruptcy filings by the likes of Vencor and Sun Healthcare Group.

The dire results mean that about 10% of the nation's entire nursing home facilities are now run by companies under Chapter 11 protection, analysts said. Most of the troubled firms blame their woes on recent changes in the Medicare program under the Balanced Budget Act of 1997, which reduced payments to skilled nursing facilities.

But critics of the health-care industry said that many of the troubled firms took advantage of the old system, using their guaranteed payment system to fund expansions into other fields that in some cases had little to do with their primary functions.

Distressing News

This news would at first blush seem distressing mainly to stockholders in health-care companies. But sources on the CMBS buyside said they are wary that the industry's problems will reverberate throughout their industry, which seems to be at last getting back on its feet after the trauma of 1998.

"The tragedy is that this week the CMBS market showed signs that it was really coming back to life," said one syndicate pro, who said that his desk did more in secondary trading in one day last week than they had been regularly doing all week in January. "I really hope this doesn't scare anyone away."

A Particular Worry

In particular, CMBS sources are worried about IHS, which has already missed interest payments on bank and bond debt.

The company has said that as part of its reorganization it will seek to renegotiate with its lenders to reduce its outstanding debt.

The company has hospital loans in several CMBS deals that were issued throughout the mid to late 1990s, perhaps most crucially in LTC 96-1, a $112 million deal underwritten by Goldman, Sachs & Co., in which it makes up 15% of the collateral.

Fitch IBCA analysts said that neither MPA nor IHS has publicly disaffirmed any leases as of last week, and as such, the deals with exposure to such firms should be considered adequately protected.

But despite such disclaimers, the last thing the commercial MBS market needs is a new dose of insecurity, one trader said.

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