Cold, hard, spendable cash. The more you need it, the more difficult and costly it is to get.
For struggling and tapped out members of the healthcare industry, shopping for a loan can be a dicey proposition, made more so by a rising perception of risk. A highly publicized rash of defaults and bankruptcies in healthcare during the past two years-including the multimillion-dollar collapse of Allegheny Health, Education and Research Foundation in Pittsburgh-has done little to instill confidence in banks and other commercial lending institutions.
Finance experts say they've even seen numerous lenders, particularly foreign banks, pull out of healthcare lending entirely.
Healthcare, in fact, now replaces the perennially loathed retail sector as lenders' least-favored industry, according to a new survey by Phoenix Management Services, a Chadds Ford, Pa.-based turnaround management firm. Nationally, 69% of survey respondents named healthcare as the "least attractive" lending prospect among 16 diverse industries, from manufacturing to mining (Oct. 4, p. 32).
"I think healthcare is an industry that as a whole has a lot of negativity associated with it," says Michael Jacoby, an executive vice president of Phoenix Management. "If there is a bad or sizable bad loan in an institution, folks in that institution will remember that for quite a while."
If the possibility of troubled loans hasn't dampened lenders' spirits, the Federal Reserve Board is warning lenders not to stray from sound lending practices. In a Sept. 28 letter, the Fed cautioned against lending money based on borrowers' overoptimistic view of the economy and financial markets.
What does that mean for healthcare borrowers? As unbridled enthusiasm for the economy cools a bit, lenders appear to be paying closer attention to loan structure in all industries, Jacoby notes. That means more due diligence, more collateral and higher rates, he says. "It may mean less capital, period," he adds.
And as Phoenix Management's survey findings seem to indicate, the capital crunch could broadside the healthcare industry in particular. Jacoby's group polls lenders every quarter to gauge shifts in the nation's lending climate. Its third-quarter survey was distributed nationally in August. Results released late last month reflected the attitudes of roughly 100 lenders working for commercial banks, finance companies, factors and other financial institutions. Respondents included small lenders, whose average loan was less than $1 million, and major financiers, whose loans generally exceeded $10 million.
It was the second consecutive quarter during which lenders ranked healthcare the most unattractive industry for the following six months. Notably, though, the margin of distaste for healthcare widened by 14 percentage points, compared with the previous quarter's survey. (Fifty-five percent of second-quarter respondents said healthcare would be least attractive to their respective institutions for the next six months.)
Unfortunately, the survey did not distinguish among various sectors of healthcare, such as physician groups, medical equipment suppliers and long-term-care companies. Phoenix Management intends to refine the survey next quarter.
Despite negative perceptions, some lenders continue to see dollar signs where others fear to tread. When Phoenix Management asked lenders to name the most attractive lending prospects, healthcare popped up-albeit low on the radar screen. Ten percent cited healthcare as most attractive, down from 13% the previous quarter.
"There are good companies in every sector of healthcare," explains Jacoby.
In fact, Banc of America Securities, which arranges large financing for healthcare companies, continues to see opportunity in the industry.
"It's primarily long-term care that's dragging down the industry as a whole," says Bill Bowen, managing director and co-head of the firm's Charlotte, N.C.-based syndicated healthcare financing group. A lot of banks, he says, carry portfolios containing troubled healthcare loans. "There are a lot fewer investors in this paper in general," he says.
But healthcare is cyclical, says Lucine Kirchhoff, also a managing director and co-head of the healthcare group. Two years ago, she recalls, financiers loved the industry for its spectacular returns. Back then banks priced healthcare loans at a 25 basis-point discount, compared with the credit's underlying rating. Today, the opposite is true, she says. Healthcare borrowers can pay a 25 basis-point premium.
Those sticking with healthcare today tend to have long-term relationships with healthcare clients whose use of other banking services generates profits and justifies lenders' continued participation in the sector, Kirchhoff says.
And some lenders are betting the current turmoil in healthcare will pave the way for better returns. As over-leveraged healthcare companies sell financially flagging pieces of their operations, new investment opportunities will open up, Bowen observes. The "smart money," as he calls it, will be attracted to those undervalued companies that have cleaned up their acts.