No longer frowned upon as poor stepchildren, medical groups are wielding more clout in the capital markets. As they grow in size and experience, new financing instruments are becoming available to them.
"Size is an issue," said David L. Varwig, senior managing director of Citadel Group in Chicago. "You want enough of a group to establish stability and ongoing cohesiveness."
Citadel, through its Medical Building Funding V subsidiary, recently completed what it says is the first "securitization" of a loan to a medical group practice. The $12.3 million loan was provided to Beaver Medical Clinic, a multispecialty group practice in Redlands, Calif. The loan was securitized through the sale of commercial paper. In other words, the loan was packaged and sold to investors as debt securities.
Rabobank Nederland in New York provided a letter of credit to back the loan; Washington-based National Cooperative Bank has a $5 million participation in the letter of credit.
With 104 physician employees, 72 of whom are shareholders, and 60,000 managed-care patients per year, Beaver Medical Clinic easily met financiers' size requirements.
Beaver Medical is using $7.6 million of the financing proceeds to build and equip a three-story, 90,000-square-foot medical office building in Highland, Calif. The existing leased facility supports seven physicians, but the new building will quadruple the number of physicians and its patient base. The balance of the loan is being used to refinance other facilities.
The variable rate on the money, currently 7.3%, is more than 200 basis points, or 2 percentage points, per year cheaper than what a local bank could have provided, Varwig said.
"I wanted a long-term financing deal," said David DeValk, Beaver Medical's chief executive officer. But when DeValk approached local commercial banks, they would only agree to provide financing for 50% of the medical office building's value because of the risk associated with such loans. Although Beaver Medical has never been late on a loan payment, the clinic would have had to come up with the other 50% of the money. That was "too much money up front," DeValk said.
The securitization program also required a heavy upfront cost. Beaver Medical will pay almost twice as much as the typical fee charged on a commercial bank loan. But the lower interest rate more than compensates for the initial costs, DeValk said. In addition, by combining the medical facility loan with other refinancing needs, he obtained the 20-year financing he was seeking.
Traditionally, physician group practices have been small, fragmented mom-and-pop shops that haven't had the ability to go to the capital markets. Most of their financing needs have been satisfied through loans from local banks.
As medical groups get bigger, their credit needs are getting bigger, said Richard Schulze, a senior vice president with Rabobank. The Dutch agribusiness bank entered the healthcare sector 18 months ago and has provided $15 million in financings to the industry.
Rabobank was attracted to Beaver Medical Clinic because "they have a commanding share of the market, they are well managed, and they have a good strategy for success in the market," Schulze said. The bank has other medical group financings in the pipeline.
Darrell M. Johnson, vice president of corporate banking at National Cooperative Bank, sees lots of opportunities for medical group financings. They are a natural fit for the bank, which has committed $1 billion to the healthcare industry and has extensive expertise in financing HMOs and community health centers.
"Everybody wants to affiliate with physician groups in one form or another," Johnson said.