Hospitals affiliated with Daughters of Charity National Health System may soon reap the same benefit of lower costs for tax-exempt bond financings that the nation's most profitable Catholic system now enjoys.
During the past year, Jerry P. Widman, senior vice president of finance of St. Louis-based Daughters of Charity, has been developing an innovative plan that would expand the system's obligated group to allow non-owned hospitals to participate in tax-exempt bond issues backed by the system's strong AA credit rating.
"The concept of an obligated group is that everybody is jointly and severally liable for each other's debt," Widman said. "An expanded group includes entities not directly under the control of the obligated group."
Under Daughters of Charity's proposed expanded obligated group, hospitals that participate must agree, among several provisions, to meet the same financial ratios that hospitals within the original obligated group are required to follow, Widman said.
"They also must commit to doing something for the community and the poor," Widman said.
Once the requirements are met, benefits of the expanded obligated group include lower bond financing costs, lower bank costs, improved access to capital and strategic management opportunities, Widman said (See chart).
Typically, bond transactions completed with Daughters of Charity's credit backing cost less than 1% of proceeds, Widman said. Stand-alone hospitals generally spend 1.5% to 2% of proceeds. The difference could mean hundreds of thousands of dollars, he said.
"This (expanded group) will save money and management time," Widman said.
With support for the concept from the investment banking community, all Widman needs now are willing hospitals to complete the first deals.
"In the next six months we will have someone with a level of interest to do a financing," he said. "This will revolutionize tax-exempt bond financing like the obligated groups did 12 to 15 years ago."
James Blake, an investment banker with Smith Barney in Chicago, agreed.
"(Daughters of Charity) has come up with a great way of recognizing the realities of having semi-autonomous partners coming together on a credit basis," Blake said. "Some (hospitals) have linked for strategic planning and budgeting reasons. Now they can have joint control while having extremely strong access to capital through shared risk."
A spokesman for Baptist/St. Vincent's Health System in Jacksonville, Fla., said the system is studying the concept. Baptist/St. Vincent's is a partnership between Baptist Medical Center and St. Vincent's Medical Center, a 734-bed facility owned by Daughters of Charity.
The way Daughters of Charity's program is structured, non-owned hospitals linked with the system's hospitals in regional delivery networks would join the obligated group through a participation agreement, Widman said. Those hospitals in each regional network would be required to carry a combined A rating or better to join, he said.
Twenty-three of Daughters of Charity's 37 owned hospitals are in the system's obligated group. In the past 13 years, the system has completed more than 70 tax-exempt bond deals totaling about
$2 billion, Widman said. Each deal was rated Aa by Moody's Investors Services or AA by Standard & Poor's Corp., two New York-based credit-rating agencies.
The expanded obligated group also bolsters Daughters of Charity's strategy of linking its stand-alone hospitals with other institutions to form community-based regional delivery networks. Over the past several years, the system's hospitals have formed community-based networks in Chicago; Cumberland, Md.; Detroit; Jacksonville; and Milwaukee. The joint arrangements range from mergers to co-sponsorship models.
"These hospitals are coming together for the benefit of the community," Widman said. "We are offering them improved access to capital and a wider variety of financing vehicles."
From a strategic perspective, the expanded obligated group is another benefit Daughters of Charity can use to persuade a hospital to link with the system in a regional delivery network, Widman said.
"Our focus is to try to work together with other providers in communities, and it also demonstrates collaboration," he said. "This is partnering and sharing with others who have similar values.
"The trickiest part is getting people to understand that (the expanded obligated group) is not a merger," Widman added. "This is a credit structure; it's group purchasing applied to financing."
Widman said the expanded obligated group also gives tax-exempt hospitals another financing option to fund projects or acquisitions.
Besides traditional tax-exempt bond financing, Daughters of Charity also offers a taxable commercial paper program, a capital financing program for equipment costing less than $10 million, variable-rate demand bonds, fixed-rate bonds, letters of credit and lines of credit, Widman said.
For example, Daughters of Charity, through a one-year line of credit, would guarantee bond payments for affiliated regional delivery networks with credit ratings lower than A. These networks would consist of a hospital owned by Daughters of Charity and its partner hospitals.
"Investor-owned chains like Columbia/HCA (Healthcare Corp.) have equity financing," Widman said. "We will never have that. We are trying to develop a financing program so that when our CEOs have a strategic initiative they don't have to worry about money."