Transcript Document
Access to the Capital Markets: Finding Financing in a Down Economy
Florida HFMA Hollywood Beach, Florida / September 16, 2010 Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Agenda
• Industry Perspective and Credit Implications • 2009 Capital Markets Re-Cap • Capital Markets Update In the New Economy • Concluding Thoughts: What We ’re Telling Our Clients • Appendix Florida HFMA Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Industry Perspective and Credit Implications
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Feeling Squeezed Even Before the Impact of Healthcare Reform?
Reimbursement pressures and RAC/ short stay issues Bond covenants Investment losses Physician shortages/ recruitment/ retention Capital access/ cost and the need to fund growth strategies Increasingly competitive markets Pension funding Specialty hospital/ ambulatory niche competition
Impact on operating cash flow and balance sheet stability?
Payor mix deterioration with rising bad debt and charity Aging Infrastructure Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
Information technology needs Equipment replacement/ new technology 4
Florida HFMA
Deteriorating Industry Metrics Began in 2008 but have showed signs of rebounding in 2009
Operating margin Debt service coverage 3.5% 4.5
3.0% 2.5% 2.0% 1.5% 2.9% 2.7% 2.4% 2.1% 1.7%1.6% 2.5% 1.8% 3.5
2.8
3.0
3.4
3.7
3.9 4.0
3.3 3.4
Pre-healthcare reform the industry has already experienced: 1.0% 2.5
0.5% 0.0% 120.0
20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 Days cash on hand 180.0
160.0
166.6
161.6
156.9
148.7
155.0
145.8
140.2
140.0
129.9
20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 1.5
20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 115.0% 110.0% 105.0% 100.0% 95.0% 90.0% 85.0% 80.0% Cash to debt 110.7% 106.4% 104.0% 105.5% 102.0% 96.7% 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09
• • • Strained operating performance (volume decline, reimbursement, bad debt/ charity, etc.) Considerable pressure on liquidity (investments, pension, etc.) Capital needs to address aging facilities, IT, physician integration and strategic investment outweighing available resources
Debt to capitalization 42.0% 41.0% 41.0% 40.0% 40.0% 40.1% 39.5% 39.1% 39.0% 40.9% 38.3% 41.4% 38.0% Capital expenditures as a % of depreciation 165% 157% 155% 152% 149% 145% 142% 140% 135% 133% 131% 131%
• Negative industry outlook by Moody ’s and Fitch
37.0% 125% 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09 20 02 20 03 20 04 20 05 20 06 20 07 20 08 20 09
Note: Based on overall median information published by Fitch Ratings, Moody ’s Investors Service and Standard & Poor’s Stand Alone. Some differences in ratio definitions and in credits are included.
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Ratio of Downgrades to Upgrades Shows Volatile Industry Dynamics
Medicare DRG, Tax Reform Act of ‘86; early 90s recession Relative stability (pre-BBA, Hillary care fails) Volatility post-BBA/ managed care Stabilization returns Deep recession Wait and see
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 4Q 08 1Q 09 2Q 09 3Q 09 4Q 09 1Q 10 2Q 10 Downgrades surpassed upgrades in 18 out of the last 22 years
Source: Moody ’s Investors Service, July 2010 Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Key Themes from Rating Agencies
1.
The lingering effects of a weakened economy will continue to apply pressure on not-for-profit hospitals 2.
Although equity and credit markets have partially recovered, many capital structures are exposed to letter of credit renewals, pension fund needs, and liquidity requirements 3.
Hospitals must address capital needs that may have previously been delayed during the financial crisis 4.
Additional cost cutting may be difficult on top of the significant reductions many hospitals have already made 5.
Expiration of federal stimulus subsidies will apply pressure on operating performance 6.
Federal healthcare reform places hospitals at risk for significant payment reductions beyond 2010 (reference Moody ’s August 9 th paper) 7.
All of the above will lead to more industry consolidation and possibly hospital closures 8.
Strong management and governance will continue to increase the gap between high and low performers Source: Adapted from Moody’s “Negative Outlook Continues Due to Sluggish Economy and Government Budget Deficits”, January 2010 Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Rating Agency Perspective Implications
• • • • • Negative rating agency outlook and downgrade-to-upgrade ratio a continued concern to potential investors and credit enhancers – Further impact on market access, costs, covenants, and security provisions New emphasis on liquidity, capital structure and investment portfolio risk – – – – – Cash: Not all investments are liquid Debt: variable interest rate volatility and put risk Enhancers: rating, terms, LOC renewability, bank ability to fund a put, etc.
Investment portfolio: risk, returns, hedge fund investment liquidity, etc.
Documents: “springing” and default covenant trigger levels, etc.
Heightened review of audit footnotes: off balance sheet structures, guarantees, operating leases, derivatives, etc.
– “Off balance sheet” ≠ “off credit” Consistency, predictability, market position, management team accountability/ effectiveness, and balance sheet management continue to be key to credit – “Remember last meeting when you said . . .” – “Show me five years of operating budgets versus audited actual” Improved communication and forthright, accurate disclosure are essential Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Financial Creditworthiness and Access to Capital Matters Now More than Ever
• • • • Virtually no healthcare system is able to fund its long-term capital requirements from operating cash flow and/or cash reserves – Access to outside capital, over the long-term, is an imperative Creditworthy organizations have better/ more flexible capital access – Less restrictive terms, conditions and provisions – – – Access to public and private markets (fixed and variable options) Access to credit enhancement Taxable or tax-exempt debt Creditworthy organizations have a lower cost of capital – – – Credit spreads are extraordinarily high: “AA” to “BBB” = 125+ basis points Access to low cost variable-rate debt Lower issuance costs: insurance premium, letter/ line of credit, underwriting/ remarketing Creditworthy organizations are market consolidators – Organizations with the highest credit rating have been the most attractive partners, have excess capital capacity and the lowest cost of capital to consolidate and remain successful in their respective markets Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Summing Up 2009 in the Capital Markets….
“If you’re going through hell, keep going ”
Winston Churchill Florida HFMA Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
2009 Re-Cap
• Public fixed rate market: early crash, but respectable recovery – – – Heavy issuer and secondary muni market supply “Buyer’s market” impact on covenants, security, and credit spreads Taxable Build America Bond popularity amongst general municipal issuers removed considerable potential competing tax-exempt paper from the market • Extraordinarily low variable rate market due to fed policy, but LOC access, pricing and terms oftentimes challenging • Continued destruction of municipal bond insurance providers – Essentially one non-federal player (Assured/ FSA) look through to the underlying credit) – can add value in fixed rate debt situations for lower credits, but not a full credit transfer (buyers will • Many providers left in sub-optimal structures – Over-weighted product mix, temporary fixes, “orphan” swaps, etc.
• Investment portfolio partial recovery – 47% increase in S&P 500 from march 2009 low, but 30% off July 2007 high • Rising long-term LIBOR rates improved mark-to-market valuation of deeply out of the money fixed payor swap positions – Reduction in very significant collateral postings Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Capital Markets Update in the New Economy
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Our “Old Economy” Capital Market Assumptions Are No Longer Valid
1.
2.
Cheap/ dependable capital access would be facilitated – – A fully functioning marketplace Investment banks as a backstop Credit enhancement to improve market access and lower cost – Expanded buyer universe even for mediocre and unsophisticated credits – Access to alternative products and structures with ostensibly lower cost and full commitment 3.
4.
Cash retention/ creation would generate net investment returns – – Cash as protection during volatile times Dependence on net positive returns to bolster operating “bumps in the road ” and support higher credit ratings Ready availability of funding for large strategic and facility plans – – Assumed access to investor dollars Only uncertainty related to cost, covenants, and security Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Capital Market Assumptions: The New Economy
• Access to capital is no longer a “given” for every credit and every project – the market is sorting out winners/ losers while the environment is subject to “on and off again” volatility • • • • Fixed-rate bonds are the sole form of fully committed capital Fixed rate credit spreads remain wide, and the overall cost of capital has increased for most organizations • LOC-backed variable-rate debt is largely uncommitted capital with considerable and unpredictable event risk Pull back and uncertainty surrounding credit enhancement (bond insurance and bank letters of credit) requires borrower ’s to protect and rely more on their underlying credit rating/ fundamentals When push comes to shove, you can ’t expect the investment or commercial banks to provide a reliable backstop to an uncommitted capital structure under all circumstances Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Unsettling Potential Capital Market Wild Cards in the New Economy
1.
Pronounced inflation expectation 2.
3.
4.
5.
Saturation of long-term Treasury bond issuance pushing up rates Increasing supply of tax-exempt debt, especially when (if) the taxable Build America Bond program ends, pushing general muni issuers back into tax-exempt market competing with hospitals Healthcare industry sector saturation as more borrowers issue fixed rate debt and buyers get “full up” on healthcare allocation Further bank industry collapse (e.g., commercial real estate, credit card debt, etc.) 6.
7.
Severe capital markets dislocation/ further liquidity crises Healthcare industry reform 8.
9.
Large-scale hospital bankruptcy announcement (e.g., AHERF in the 90s) Over supply of new fixed-rate issues 10.
More confidence in equities, real estate, or commodities shifting money out of tax-exempt bonds Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Capital Sources Today: Good, but Not Great, and No One Size Fits All
1.
2.
3.
4.
5.
6.
7.
8.
9.
Variable-rate demand bonds supported by a commercial bank letter of credit or self liquidity Fixed-rate bonds Private placements Direct bank lending (bank or non-bank qualified) Capital/ operating leasing Asset monetization/ developer-funded structures Operations Working capital management (A/R reduction and A/P extension) Outside support: grants, philanthropy, payor rate increases, government tax support, etc.
10.
Capital investment deferral, downsizing, and/or elimination 11.
Outside capital partner (merger, joint venture, etc.) 12.
Other Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Long-Term, Fixed-Rate Investors Remain Cautious, but Are Still Buying
• • 30-year fixed rate access, costs and terms highly dependent on credit rating, perceived staying power and state tax advantages to investors – – – “AA”: “A”: 4.62%+ 5.17%+ “BBB”: 5.87%+ Underlying credit/ market fundamentals matter most, so expect to speak with buyers more diligently looking for highly rated, well-positioned, long-term market-winning borrowers – – Extended pre-marketing period (full one to two weeks) Investor calls and possibly in-person investor meetings/ road shows, depending on credit – – Heightened review of Appendix A and credit reports Buying opportunity for retail investors Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Fixed-Rate Investors Require More Security and Covenants than in Prior Years
• Continue to expect a buyer’s market with a lot of supply – now is not the time to cut corners and push the edge on security, structure, covenants, and disclosure – Security structure expectations Revenue pledge a given for all credits Mortgages for most “A” and lower credits (plan ahead, this takes time) Debt service reserve funding for nearly all “A” category and lower credits – Covenants and structuring matter more to fixed rate investors Liquidity covenant and periodic use of capitalization covenant Tightening thresholds for additional debt, asset disposition, senior liens, etc.
Parity with existing commercial bank LOC and insurer covenants an emerging trend (be prepared to address this head-on during investor calls) – Disclosure quality, timeliness and responsiveness 45 to 60 days quarterly (yes, all 4 quarters) and 120 to 150 days audit Direct obligation to investors Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
20-year MMD Fixed Rate, Tax-exempt, G.O. Issuer Benchmark Trend Has Been Favorable
0% Frequency 10% 20%
Tax-Exempt Fixed Rates at Historic Lows 20 - Year MMD Benchmark Index
10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% - Current Rate: % Observations Below Current Rate: Historical Average: Historical Max: Historical Min: 3.50% 0.10% 5.46% 8.85% 3.43% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
But, Credit Spreads Have Widened
Healthcare Credit Spreads
'AA', and 'A',Healthcare Credit Spreads over MMD 'AAA' Benchmark Index 30Y AA Spread 30Y A Spread 3% 2.5% 2% 1.5% 1% 0.5% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Statistics Current Average High Low 30Y AA Healthcare 1.07% 0.43% 1.67% -0.06% 30Y A Healthcare 1.53% 0.85% 2.55% 0.17% • Recent BBB Deals – – – Hawai’l Pacific Health Obligated Group, Series 2010B (A3/BBB+/A-), $61.21 mm, 190 221 bps spread (7/7/10) Olmsted Medical Center Project, Series 2010 (NR/NR/BBB-), $20.36 mm, 219-238 bps spread (6/30/10) Gerald Champion Regional MC, Series 2010A (NR/BBB+/NR,$74.72 mm, 235-249 bps spread (6/25/10 pricing) – La Vida Llena, Series 2010A (NR/NR/BBB), $18.86 mm, 215-240 bps spread (6/25/10) Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Short-Term, Variable Rate Investors Looking for Safety and Liquidity Continue to Step Up…for Now
• • • • Large money market funds remain the backbone of this market VRDBs supported by “good banks” remain attractive – – “Good banks” have the highest ratings (perceived staying power) and are not overexposed in the LOC market The best of the “good banks” typically have long-term “AA” category and short-term ratings as follows: Moody ’s Investors Service: “VMIG-1”, Standard & Poor ’s: “A-1+”, “A-1”, Fitch Ratings: “F-1+”, “F-1” – Monitor long-term and short-term ratings carefully – many banks have either been downgraded, have negative outlooks, or are on credit watch Documentation/ structuring details under heightened review – – – What exactly happens if the remarketing agent resigns or goes out of business and a replacement can ’t be found?
What exactly happens if the bonds are put and the bank can ’t cover?
How close is the borrower to a downgrade-triggering LOC termination?
How long will investors accept short-term, tax-exempt rates yielding under 0.3% vs. moving into other higher-yielding investment opportunities (equities, real estate, commodities, etc.)?
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Access to Bank Letters of Credit Remains Okay for Now, but Expect…
• • • • • Current relationship bank(s), if highly rated, will likely be your best partner (one-off lenders to non-comprehensive clients are very infrequent) Less capacity for any one borrower (generally $50 to $85 million for a stand-alone hospital, perhaps more for systems and highly rated stand alone hospitals) – Bank syndication available on a “best efforts” basis, but complicated/ costly – – – – Higher pricing Shorter renewal cycles (364-day to 3 years) Annual evergreen renewal provisions very helpful Insist on “real” term-out provisions in the event of remarketing failure: 3-5 yrs Restrictive and highly negotiated covenants, security, and termination provisions – Be mindful of borrower rating (e.g., “A-”) downgrade termination triggers Possible subjective consent provisions (e.g., issuing new debt, asset disposition, mergers, joint ventures, sale/ lease back, etc.) Significant tie-in with other commercial banking services a given Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Cautious Period Upcoming for Bank Facility Renewals
• Bank facility expirations between 2010 and 2013 are concentrated within five banks – Traditionally, banks diversify industry exposure so a heavy weighting relative to total industry expirations may signal added risk for non-renewal – 80% of healthcare industry Bank ’s expirations ($26 billion) within the next four years are accounted for by JP Morgan Chase, Bank of America Merrill Lynch, Wells Fargo, Assured Guaranty, and US – 2011 is a pivotal point for expirations and heavy concentrations also extend to Suntrust and LBBW with approximately $1 billion of expiring bank facilities
BANK FACILITY EXPIRATION CONCENTRATION
($mms) 2010 2011 2012 2013 Total 2010-13 JPM BAML WF US Bank AG Subtotal Total Industry Subtotal as % 523 1,582 262 197 262 2,826 3,887 73% 2,527 2,254 3,262 1,302 3,262 12,608 14,335 88% 1,718 975 1,019 1,258 1,019 5,989 7,914 76% 2,095 1,421 205 407 205 4,333 5,972 73% 6,863 6,232 4,749 3,164 4,749 25,756 32,108 80% Source: Thomson Financial. Include SBPA and LOC expiration dates for healthcare issuance. Data changes on occasion as contracts are evolve; such changes may not be captured by data above. As of May 19, 2010.
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Summary Tax-Exempt Healthcare Financing Product Costs and Risks
Variable Rate Alternatives VRDNs LOC-backed Uninsured Synthetic Floating Uninsured Fixed Fixed Rate Alternatives SIFMA Synthetic Fixed Rate LIBOR Synthetic Fixed Rate Annual Cost
30-yr Rate ( “A” credit) Remarketing Agent Broker Dealer Auction Agent LOC Fees Basis Risk Insurance (annualized) Total Cost
Risks
Interest Put Tax Industry Bank Renewal Collateralization Risk Own Credit Downgrade Basis Counterparty Market to Market Buyers 10-year No Call SIFMA 0.10% n/a n/a 1.20% n/a n/a SIFMA + 1.30% Yes Yes Yes Yes Yes No Yes No No No Money market No SIFMA + 1.45% n/a n/a n/a n/a n/a n/a SIFMA + 1.45% 5.17% n/a n/a n/a n/a n/a n/a 5.17% Yes No Yes No No Yes No No Yes Yes Retail/ institutional Yes No No No No No No No No No No Retail/ institutional Yes 3.03% 0.10% n/a n/a 1.20% n/a n/a 4.33% + basis risk 3.29% 0.10% n/a n/a 1.20% ???
n/a 4.59% + basis risk No Yes Yes Yes Yes Yes Yes No Yes Yes Money Market No No Yes Yes Yes Yes Yes Yes Yes Yes Yes Money Market No Note: Estimated costs as of 8/16/10 excluding fixed transaction costs (legal, accounting, trustee, etc.) which are assumed to be equal across all options.
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
A Reminder of Primary Variable Rate Demand Note Risks
Risk Interest rate increase Tax rates decline Healthcare industry risks Borrower credit downgrade Bank downgrade Mitigating factors
• • Fixed payor swaps, if in place, may act as a hedge against general rate inflation via short term LIBOR assuming a correlation is maintained Portfolio returns on any short-term/ fixed-income investments • None, but seems very unlikely in the near term • Bank LOC enhancement will shield most, but not all, of the interest rate risk (however, healthcare industry risks may affect cost or availability of the bank LOC) • Bank LOC usually okay if Borrower is at least mid “A” category or higher (will affect pricing and availability, though) • • Use highly rated banks Ability to replace LOC provider if alternates exist
Bank LOC renewal VRDN market demand/ supply concerns and dislocation Failed debt remarketing (bank put)
• • • • Maintenance of Borrower’s credit rating in the “A” category or better Use relationship bank Ability to replace LOC provider Add “evergreen” provisions or longer-dated renewal terms (3 years, if available) • • Historical stability/ marketability of VRDN market up until now VRDNs have traded very well over the last 17 years at an average of 3.09% with a range of 0.27% to 7.89% • Bank term out provides time to fix (depending on the course of the put – bank, market, remarketing agent, etc.)
Inability of bank to fund a bond put
• Check documents for provisions and procedures as to whether this is an event of default
Options
• • • Stay the course Refinance to fixed (more expensive) Cash prepayment • • • Stay the course Refinance to fixed (more expensive) Cash prepayment • • • Stay the course Refinance to fixed (more expensive) Cash prepayment • • • Stay the course Refinance to fixed (more expensive) Cash prepayment • • • • Stay the course Refinance to fixed (more expensive) Cash prepayment Replace LOC provider • • • • Stay the course Refinance to fixed (more expensive) Cash prepayment Replace LOC provider • • • Stay the course Refinance to fixed (more expensive) Cash prepayment • • • • Stay the course Refinance to fixed (more expensive) Cash prepayment Replace LOC provider • • • Refinance to fixed (more expensive) Cash prepayment Replace LOC provider Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Where Do We Go from Here?
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
The Credit Markets Continue to Expect Market Winners to Have Good Answers to These Questions
Strategic Planning Financial Planning Capital Allocation Capital Structure Budgeting/ Reporting Exit Rules/ Options
How do you maintain or improve your market position in your service area? How much will it realistically cost? Are you prepared to do what’s necessary to compete aggressively? How will competitors react? Then what? How do the physicians fit into your long-term strategy?
Can you afford your strategic plan within an acceptable credit and execution risk context? What if you're wrong? Then what? Is it too risky? How much should you spend? Is spending directed at the right strategies? What is the risk adjusted discounted cash flow return of the capital project portfolio? How has actual versus projected performance measured up?
What is the right amount, mix, structure, and cost of debt and equity? How risky is the capital structure?
Do you have the tools and process to deliver a credible budget tied to your strategic financial plan? Is it achievable? Is there accountability for results? What if you fall short? Then what?
Which services or facilities? Under what conditions? How?
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
The Emerging Success Model Will Require…
1.
Scale and size 2.
3.
4.
5.
A strong position and multiple operations in the geographies served A solid, integrated physician platform A care, cost, and quality management culture Sophisticated IT and care management infrastructures 6.
7.
Acute attention to operations and business portfolio management Consistent levels of adequate cash flow to reinvest capital at competitive levels supporting facility, IT and strategic needs 8.
9.
A no-nonsense, corporate-based approach to capital allocation emphasizing return on investment at a risk adjusted rate A durable balance sheet with the ability to fund capital needs internally from time to time during market volatility 10.
A healthy respect for maintaining creditworthiness, appropriately managing capital structure and preserving access to capital
Healthcare Reform Will Profoundly Influence the Business Model from Volume-based to Value-based – Expect a Bumpy Transitional Period Over the Next 3 to 5 years
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Final Thoughts: What We’re Telling Our Clients
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Concluding Thoughts
1.
2.
3.
4.
Long-term access to capital will require focused market and clinical strategies along with intense operational discipline – Balancing act amongst difficult trade-offs to keep the financial house in order: both income statement and balance sheet – Credit position matters more now than ever (access, cost, and flexibility) Expect that externalities will play a larger role in all decision making – – Bond market disruptions, interest rate volatility, investment losses, pension funding, operating pressures, economic recession, Medicare, etc. Don’t count on outside help from the payors, the government, the capital markets, or donors – they all have their own problems to solve Protecting the balance sheet in light of emerging market realities continues to translate to capital plan deferrals and/or downsizing – Do the projects now provide adequate strategic and financial value?
Environment will create unprecedented hospital and physician consolidation opportunities – Driven by the search for long-term growth and scale and the need to cut costs and access capital in support of long-term survivability – Materially financially impaired organizations may not be able to find a partner Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Concluding Thoughts
(continued) 5.
6.
7.
Know your bond, bank and swap documents well – unpleasant issues are continuing to surface – Covenant breaches requiring waivers, consents, swap collateralization, downgrade triggers, springing DSRFs, etc.
Capital structure risk continues to be front and center – – – – Fixed-rate bonds are the only form of long-term, committed capital Untangling existing capital structures contingent upon insurance ratings, bank LOC availability, swaps, etc., has been more difficult and expensive Read the fine print – deal details important to fully understand Diversification is ideal, but may not be possible in many circumstances: credit providers, remarketing agents, swap providers, etc.
If you have to borrow, there’s nothing wrong with fixed-rate bonds if that market is available to you – The low-rate, freewheeling credit environment prior to July 2007 no longer exists – expect interest rates in the 5% to 7% range, credit depending – Pay attention to the timing of selling your bonds and what other deals will be in the market at that time – over supply continues to be an issue Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Concluding Thoughts
(continued) 8.
Variable-rate debt is currently very attractively priced and needs to be considered, but generally requires a stable relationship with a “good bank” and creates exposure to many risks – Risks are considerable: interest rate, market dislocation, bond put, bank downgrade, LOC renewal, bank covenants, etc.
– A new ratio to consider: unrestricted cash to variable-rate debt 9.
Nontraditional sources of capital are an option – – – – – HUD/ FHA 242 Bank loans (bank qualified and non-bank qualified) Other direct loans/ private placements Real estate monetization Leasing Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Appendix
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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Florida HFMA
Mark E. McIntire,
Vice President
Mark McIntire is a Vice President of Kaufman Hall and a member of the firm’s financial advisory practice. Mr. McIntire works with a wide range of healthcare organizations, providing financial advisory services for clients engaged in bond issues, derivative transactions, and/or merger and acquisition activity. Mr. McIntire also supports Kaufman Hall’s financial management software, the ENUFF Software Suite ® . Prior to joining Kaufman Hall, Mr. McIntire served as a senior analyst in JPMorgan’s Midwest healthcare investment banking practice, where he focused on structuring bond transactions and advising on derivative products. Mr. McIntire is a frequent speaker at professional conferences, including chapters and regional meetings of the Healthcare Financial Management Association, the Child Health Corporation of America, and other organizations. He has written extensively on the topics of leasing and best-practice financing, with articles having appeared in
hfm
magazine and
Strategic Financial Planning,
among others.
Mr. McIntire has an M.B.A. from the University of Michigan Business School and a B.S. from Indiana University.
Kaufman, Hall & Associates, Inc.
5202 Old Orchard Road, Suite N700 Skokie, Illinois 60077 847.441.8780, ext. 114 847.965.3511 fax [email protected]
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
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