Tax-exempt healthcare systems are responsible for a tiny fraction of the nation's $684 billion of commercial paper. But a growing number of them, like the big corporations and finance companies that dominate the commercial paper market, are wielding their credit clout to take advantage of the short-term, taxable debt instrument.
Commercial paper rips through the thicket of red tape normally associated with debt financings by tax-exempt providers. And with rates below the benchmark 30-year Treasury bond, it provides a lower-cost source of capital.
The use of taxable debt instruments by tax-exempt healthcare providers mirrors the rise in non-tax-exempt capital needs.
Indeed, Holy Cross Health System Corp.'s $100 million taxable commercial paper program, developed last March, provides short-term capital for the taxable financing needs of its 14 hospitals, such as investments in physician practice acquisitions, said Stephen Felsted, executive vice president and chief financial officer of the South Bend, Ind.-based system.
"I think we're seeing more healthcare systems nationally exploring the use of taxable debt alternatives" such as commercial paper, said Jay Sterns, senior vice president and national director for healthcare finance at Ziegler Securities in Chicago.
In the coming weeks, Daughters of Charity National Health System, through its obligated group, plans to roll out a taxable commercial paper program for the benefit of its 23 member hospitals and affiliates. The St. Louis-based system plans to offer $150 million of the short-term promissory notes through New York-based Smith Barney. Daughters' board has authorized the system to issue as much as $250 million of the notes.
Commercial paper proceeds may be used by system hospitals to finance a variety of capital needs, including professional office buildings, clinics, surgical centers, physician networks, information systems and working capital.
Interest rates on commercial paper generally undercut rates on long-term bonds because of the high creditworthiness of the issuers. Ninety-day commercial paper recently closed at 5.45%, below the 6.14% yield on 30-year Treasuries and below current tax-exempt healthcare rates in the 6% range.
With 159 days of cash on hand and $1.2 billion in unrestricted cash and investments for its fiscal year ended June 30, Daughters' liquidity is "excellent," according to Fitch Investors Service, a New York-based credit-rating agency.
"It makes sense for these guys to do it because they can back up the commercial paper program with their own liquidity," said Fred Hessler, managing director of Smith Barney's healthcare group.
Daughters' commercial paper program emerged through "an extensive overhaul" of the system's financing tools, said Jerry Widman, Daughters' senior vice president of finance. Leveraging its AA credit rating to the "strategic advantage" of member hospitals and affiliates, Daughters of Charity plans to unveil a commercial paper program as part of a cadre of new financing products and services, including financing for professional office buildings, leasing arrangements and financial guarantees using Daughters' credit.
The commercial paper program fits the needs of hospitals whose capital requirements may not qualify for tax-exempt money, and "it's nowhere as restrictive in its use as tax-exempt bonds are," Widman said. Because commercial paper financing is easier to structure, there are "less attorneys involved," he added.
An "offering memorandum" describing a commercial paper program launched earlier this month by Benedictine Health System hints at the ease of such transactions. The seven-page memo contains a fraction of the detail contained in the typical 100-plus page "official statement" describing a tax-exempt healthcare bond sale.
Benedictine's $30 million commercial paper program will provide capital to members and corporate affiliates of the five-hospital system, based in Duluth, Minn. This month, the system issued $7 million of the notes to replace a bank line of credit previously used to finance things like computed tomography scanners.
Benedictine officials knew of commercial paper but hadn't pursued the option until Ziegler Securities, its investment banker, mentioned it. "We thought it was more for industry or other for-profit corporations to use," said Barry Halm, Benedictine's president.
Compared with the existing bank line, commercial paper will save one percentage point in interest expense, or about $90,000 to $100,000 annually, Halm said.