Columbia/HCA Healthcare Corp. needed a $3 billion bank credit line to replace the two companies' separate credit facilities as part of its merger last week.
Three billion dollars? No problem.
More banks rushed to get a piece of the deal than Columbia/HCA needed. Flush with cash to invest in relatively low-risk hospital companies, dozens of bankers wanted a piece of the action.
"There are so few deals out there. People are really hungry," said May Munoz, who heads the healthcare group at the Bank of Nova Scotia, Toronto. Her group, which is based in Atlanta, manages a $1 billion healthcare portfolio, 75% of which is invested in acute-care hospitals.
A syndicate of lenders led by New York-based Chemical Bank eventually won the competition and supplied the $3 billion credit facility for Columbia/HCA. The money serves as a kind of collateral for Columbia's commercial paper program, on which it pays 3.3% interest.
From early indications, similar bank financings by HealthTrust-The Hospital Co. and OrNda Healthcorp will get similar receptions. These three companies-Columbia, HealthTrust and OrNda-were eight companies just one year ago.
Fewer customers. That means fewer hospital companies need bank financing. At the same time, "all the banks are much stronger than they've been for some time," said Walker Choppin, a senior vice president who heads the medical industries group in the Nashville, Tenn., office of NationsBank.
The Bank of Nova Scotia and New York-based Citicorp are leading a $750 million bank line to finance the proposed three-way merger of OrNda, American Healthcare Management and Summit Health this month. Nashville, Tenn.-based OrNda will be the surviving company, becoming the nation's fifth-largest hospital chain.
Syndicating the deal to other banks who want to take part of the credit line is going well.
"We've had a massive amount of calls on the OrNda and HealthTrust deals. People are saying, `Please don't let any new banks in,'*" Ms. Munoz said. HealthTrust also will be financing 60% of its $1 billion acquisition of Epic Healthcare Group with cash and bank financing. Details of that financing haven't been announced.
Tougher competition. The competition for deals could get even tougher. Most healthcare lenders say they know of other banks starting similar divisions.
Based on the success of Bank of Nova Scotia, it might be worth it. Ms. Munoz' group boasts a 50% return on equity, thanks to taking on companies, such as HealthTrust, that were regarded as high risk.
Not only are hospital companies finding it easier to get money from banks, but they're also getting easier terms. "As a company becomes less risky, the restrictions on them become significantly less," said Carol Burt, managing director of the healthcare group at Chemical Bank (See profile, this page). She also acknowledged that restrictions have become looser as competition has increased.
This month, Columbia received the biggest credit line in its life-$3 billion-and it's virtually unsecured. Louisville, Ky.-based Columbia/HCA didn't have to back it up with mortgages on any of its 192 hospitals, and it doesn't have to check with its bankers when it wants to make capital expenditures or acquisitions.
Different times. That's a big contrast to Columbia in its early days, said David Colby, who's been Columbia's chief financial officer since 1988, when the chain had just four hospitals.
Then, Columbia executives often had to check with bankers before making acquisitions or capital expenditures. Although the banks usually said yes to Columbia's acquisition plans, "there was always the chance they could say no," Mr. Colby said.
Obviously, Columbia isn't the credit risk it used to be, bankers said. That means it can borrow more money with fewer restrictions at a cheaper rate.
Like the Columbia/HCA deal, more hospital chains may be able to get credit lines that allow them to make deals without getting their bankers' approval. "You want your borrowers to have the flexibility to build the networks they need," said Carolyn Camp, vice president in the healthcare group at First Union National Bank of Tennessee, Nashville.
Even small chains have been able to tap the banking community, as evidenced by Champion Healthcare Corp., a Houston-based firm that operates three hospitals in two states.
Champion tried to float a deal using junk bonds in late 1992 to acquire 12 Humana hospitals.
The deal didn't happen, but in January Champion executives did succeed in completing a $141 million financing, $50 million of which is a bank credit line. The three banks involved in that deal are NationsBank, First Union National Bank and Banque Paribas, a Paris-based bank.