The financial playing field has seen drastic changes since the credit meltdown in 2008, requiring industry advisers to retool their guidance for providers.
Before the credit crisis, financial advice centered on how to obtain the best rates on tax-exempt bond sales using tactics including purchasing credit enhancement, such as bond insurance and letters of credit, says Quintin Harris, vice president and banker with Lancaster Pollard. Today, however, such credit enhancement is nearly impossible to find.
Tax-exempt bonds for nonprofit hospitals are still a favored option for capital, but the structuring of that debt requires an element of strategy, Mr. Harris says. Hospitals can issue bonds to the public based on their credit profile, sell bonds to retailers and institutional investors or offer bonds on private placement or direct placement basis to just one or a few banks.
Adding an additional layer of complexities and debt opportunities, today's challenging fiscal reality for many hospitals has allowed government-backed lending and grant programs to gain more attention, such as U.S. Department of Agriculture loans for rural hospitals and U.S. Department of Housing and Urban Development loans to refinance existing debt, Mr. Harris says.
Lancaster Pollard released updated financial guides for large, small and rural hospitals, spelling out the pros and cons of available options to obtain capital.
Healthcare financial leaders face a palette of options for credit acquisition. "That's the value of Lancaster Pollard's whitepapers, because this process doesn't have to be a black box," Mr. Quintin says. "Relatively few hospital executives and their trustees have experience in the capital markets. These papers are designed to empower those management teams so they can have informed discussions with stakeholders, including city and state governments, underwriters or financial advisers."
The situation is similar even for larger hospitals, although the larger systems are more likely to engage with variable rate financing in addition to fixed rate options, especially as interest rates rise. But no matter the size of the hospital, he says, credit ratings or internal indicators of credit strength — liquidity, leverage and operating performance — are key metrics to determine the viability of an independent organization to maintain autonomy. "If you do not have investment grade ratios as an independent hospital or have a plan in place to achieve them, you soon may be having consolidation discussions with your board, " he says.
Reinvesting that money into hospital facilities also is a critical strategy that may be difficult for independent hospitals to pull off if they haven’t started the process already. "Are you spending money on a regular basis to keep up with depreciation and then some, or are you neglecting your facility?" Mr. Harris says. "People have choices, and consumerism in the healthcare marketplace is only going to grow. The time to reinvest in your hospital and begin funding improvements is now while interest rates are still low.”
Negative outlooks on particularly nonprofit hospitals from credit rating agencies has some analysts forecasting that banks may not have as strong an appetite for healthcare paper two to three years from now, Mr. Harris says. "But despite all the headwinds facing providers, in many communities, hospitals are still the strongest business in the area," making them among the most attractive recipients of banks' lending capital.
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