Florida HFMA
Access to the Capital Markets: Finding
Financing in a Down Economy
Hollywood Beach, Florida / September 16, 2010
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
1
Florida HFMA
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
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
2
Florida HFMA
Industry Perspective and Credit Implications
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
3
Florida HFMA
Feeling Squeezed Even Before the Impact of Healthcare Reform?
Reimbursement
pressures and RAC/ short
stay issues
Bond covenants
Capital access/ cost
and the need to fund
growth strategies
Physician shortages/
recruitment/ retention
Increasingly
competitive markets
Specialty hospital/
ambulatory niche
competition
Investment losses
Pension funding
Impact on operating cash
flow and balance sheet stability?
Aging Infrastructure
Information
technology needs
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
Payor mix
deterioration with rising
bad debt and charity
Equipment replacement/
new technology
4
Florida HFMA
Deteriorating Industry Metrics Began in 2008 but have showed signs
of rebounding in 2009
Operating margin
3.5%
Debt service coverage
4.5
2.9%
2.7%
2.5%
2.4%
2.5%
2.1%
1.8%
2.0% 1.7%1.6%
1.5%
3.5
1.0%
2.5
3.0%
3.7
3.9 4.0
3.4
2.8
3.3 3.4
3.0
0.5%
0.0%
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
1.5
Days cash on hand
Cash to debt
115.0%
110.7%
180.0
110.0%
166.6
161.6
156.9
160.0
148.7
105.0%
155.0
145.8
140.2
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
42.0%
39.0%
41.4%
40.9%
41.0%
40.0%
40.1%
39.5%
39.1%
38.3%
38.0%
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
37.0%
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
80.0%
Debt to capitalization
Capital expenditures as a
% of depreciation
165%
157%
155%
145%
• Considerable pressure on liquidity
(investments, pension, etc.)
96.7%
91.1%90.3%
85.0%
120.0
40.0%
95.0%
90.0%
129.9
41.0%
100.0%
105.5%
102.0%
• Strained operating performance
(volume decline, reimbursement,
bad debt/ charity, etc.)
• Capital needs to address aging
facilities, IT, physician integration
and strategic investment
outweighing available resources
• Negative industry outlook by
Moody’s and Fitch
152%
149%
142%
135% 133%
140%
131%
131%
125%
20
02
20
03
20
04
20
05
20
06
20
07
20
08
20
09
140.0
106.4%
104.0%
Pre-healthcare reform the industry
has already experienced:
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.
5
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, Hillarycare fails)
Volatility post-BBA/ Stabilization
managed care
returns
4Q
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 08
Deep
recession
1Q
09
2Q
09
3Q
09
Wait and
see
4Q
09
1Q
10
2Q
10
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
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.
6
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 9th 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.
7
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.
8
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.
9
Florida HFMA
Summing Up 2009 in the Capital Markets….
“If you’re going through hell,
keep going”
Winston Churchill
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
10
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) – can add value in fixed
rate debt situations for lower credits, but not a full credit transfer (buyers will
look through to the underlying credit)
• 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.
11
Florida HFMA
Capital Markets Update in the New Economy
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
12
Florida HFMA
Our “Old Economy” Capital Market Assumptions
Are No Longer Valid
1. Cheap/ dependable capital access would be facilitated
– A fully functioning marketplace
– Investment banks as a backstop
2. 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. 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
4. 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.
13
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.
14
Florida HFMA
Unsettling Potential Capital Market Wild Cards
in the New Economy
1. Pronounced inflation expectation
2. Saturation of long-term Treasury bond issuance pushing up rates
3. 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
4. Healthcare industry sector saturation as more borrowers issue fixedrate debt and buyers get “full up” on healthcare allocation
5. Further bank industry collapse (e.g., commercial real estate, credit
card debt, etc.)
6. Severe capital markets dislocation/ further liquidity crises
7. Healthcare industry reform
8. Large-scale hospital bankruptcy announcement (e.g., AHERF in
the 90s)
9. 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.
15
Florida HFMA
Capital Sources Today:
Good, but Not Great, and No One Size Fits All
1. Variable-rate demand bonds supported by a commercial bank
letter of credit or self liquidity
2. Fixed-rate bonds
3. Private placements
4. Direct bank lending (bank or non-bank qualified)
5. Capital/ operating leasing
6. Asset monetization/ developer-funded structures
7. Operations
8. Working capital management (A/R reduction and A/P extension)
9. 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.
16
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”:
4.62%+
– “A”:
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.
17
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.
18
Florida HFMA
20-year MMD Fixed Rate, Tax-exempt, G.O. Issuer Benchmark Trend
Has Been Favorable
Frequency
0%
10%
Tax-Exempt Fixed Rates at Historic Lows
20%
20 - Year MMD Benchmark Index
0.
1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 10
5% .0% .5% .0% .5% .0% .5% .0% .5% .0% .5% .0% .5% .0% .5% .0% .5% .0% .5% .0%
-
10.0%
Current Rate:
% Observations Below Current Rate:
Historical Average:
Historical Max:
Historical Min:
3.50%
0.10%
5.46%
8.85%
3.43%
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%
0.5%
-
1986
1988
1990
1992
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
1994
1996
1998
2000
2002
2004
2006
2008
2010
19
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
Credit Spread to Benchmark MMD Index
3%
Statistics
2.5%
2%
1.5%
30Y AA
Healthcare
30Y A
Healthcare
Current
1.07%
1.53%
Average
0.43%
0.85%
High
1.67%
2.55%
Low
-0.06%
0.17%
1%
0.5%
0%
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
•Recent BBB Deals
–Hawai’l Pacific Health Obligated Group, Series 2010B (A3/BBB+/A-), $61.21 mm, 190221 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.
20
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.
21
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 standalone 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.
22
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’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
Bank
–
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)
JPM
BAML
WF
US Bank
AG
Subtotal
Total Industry
Subtotal as %
2010
2011
523
2,527
1,582
2,254
262
3,262
197
1,302
262
3,262
2,826 12,608
3,887 14,335
73%
88%
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.
2012
1,718
975
1,019
1,258
1,019
5,989
7,914
76%
2013 Total 2010-13
2,095
6,863
1,421
6,232
205
4,749
407
3,164
205
4,749
4,333
25,756
5,972
32,108
73%
80%
23
Florida HFMA
Summary Tax-Exempt Healthcare Financing Product Costs and Risks
Variable Rate Alternatives
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
Fixed Rate Alternatives
VRDNs
LOC-backed
Uninsured
Synthetic Floating
Uninsured Fixed
SIFMA Synthetic
Fixed Rate
LIBOR Synthetic
Fixed Rate
SIFMA
0.10%
n/a
n/a
1.20%
n/a
n/a
SIFMA + 1.45%
n/a
n/a
n/a
n/a
n/a
n/a
5.17%
n/a
n/a
n/a
n/a
n/a
n/a
3.03%
0.10%
n/a
n/a
1.20%
n/a
n/a
3.29%
0.10%
n/a
n/a
1.20%
???
n/a
SIFMA + 1.30%
SIFMA + 1.45%
5.17%
4.33% + basis risk
4.59% + basis risk
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
No
Yes
No
No
Yes
No
No
No
No
No
No
No
No
No
Yes
Yes
Yes
Yes
Yes
Yes
No
Yes
Yes
Yes
Yes
Yes
Yes
No
No
No
Money market
No
No
Yes
Yes
Retail/ institutional
Yes
No
No
No
Retail/ institutional
Yes
No
Yes
Yes
Money Market
No
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.
24
Florida HFMA
A Reminder of Primary Variable Rate Demand Note Risks
Risk
Mitigating factors
Options
Interest rate increase
• Fixed payor swaps, if in place, may act as a hedge against general rate inflation via shortterm LIBOR assuming a correlation is maintained
• Portfolio returns on any short-term/ fixed-income investments
• Stay the course
• Refinance to fixed (more expensive)
• Cash prepayment
Tax rates decline
• None, but seems very unlikely in the near term
• Stay the course
• Refinance to fixed (more expensive)
• Cash prepayment
Healthcare industry
risks
• 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)
• Stay the course
• Refinance to fixed (more expensive)
• Cash prepayment
Borrower credit
downgrade
• Bank LOC usually okay if Borrower is at least mid “A” category or higher (will affect pricing
and availability, though)
• Stay the course
• Refinance to fixed (more expensive)
• Cash prepayment
Bank downgrade
• Use highly rated banks
• Ability to replace LOC provider if alternates exist
•
•
•
•
Stay the course
Refinance to fixed (more expensive)
Cash prepayment
Replace LOC provider
Bank LOC renewal
•
•
•
•
•
•
•
•
Stay the course
Refinance to fixed (more expensive)
Cash prepayment
Replace LOC provider
VRDN market demand/
supply concerns and
dislocation
• 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%
• Stay the course
• Refinance to fixed (more expensive)
• Cash prepayment
Failed debt remarketing
(bank put)
• 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
• Refinance to fixed (more expensive)
• Cash prepayment
• Replace LOC provider
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)
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
Stay the course
Refinance to fixed (more expensive)
Cash prepayment
Replace LOC provider
25
Florida HFMA
Where Do We Go from Here?
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
26
Florida HFMA
The Credit Markets Continue to Expect Market Winners
to Have Good Answers to These Questions
Strategic Planning
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?
Financial Planning
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?
Capital Allocation
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?
Capital Structure
What is the right amount, mix, structure, and cost of debt and
equity? How risky is the capital structure?
Budgeting/ Reporting 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?
Exit Rules/ Options
Which services or facilities? Under what conditions? How?
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
27
Florida HFMA
The Emerging Success Model Will Require…
1. Scale and size
2. A strong position and multiple operations in the geographies served
3. A solid, integrated physician platform
4. A care, cost, and quality management culture
5. Sophisticated IT and care management infrastructures
6. Acute attention to operations and business portfolio management
7. Consistent levels of adequate cash flow to reinvest capital at
competitive levels supporting facility, IT and strategic needs
8. A no-nonsense, corporate-based approach to capital allocation
emphasizing return on investment at a risk adjusted rate
9. 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.
28
Florida HFMA
Final Thoughts: What We’re Telling Our Clients
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
29
Florida HFMA
Concluding Thoughts
1. 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)
2. 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
3. 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?
4. 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.
30
Florida HFMA
Concluding Thoughts (continued)
5. 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.
6. 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.
7. 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.
31
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.
32
Florida HFMA
Appendix
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
33
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
mmcintire@kaufmanhall.com
Copyright 2010 Kaufman, Hall & Associates, Inc. All rights reserved.
34