Illinois hospitals are banding together to fight the high cost of raising capital to pay for construction and medical equipment.
A group of 14 Illinois hospitals will share in the proceeds of a novel joint bond offering that raised $125 million.
Hospitals usually borrow individually. But the Naperville-based Illinois Hospital and HealthSystems Association organized the joint offering as a way to reduce interest costs on smaller financings typically handled through bank loans.
This approach enables them to fund smaller projects at lower tax-exempt bond rates.
"None of these hospitals had amounts that were large enough to make it worth their while to go through the tremendous involvement to float a bond issue," says Paul Batt, senior director of Association Management Resources, an affiliate of the hospital association that helped coordinate the financing project.
The hospitals, including Edward Hospital in Naperville and Illinois Masonic Medical Center in Chicago, will use the bond proceeds for medical equipment and construction projects.
The $125 million in bonds, issued through North Carolina-based Bank of America Corp., serves as a pool for revolving loans to the individual hospitals.
Under the agreements, hospitals must borrow the money by October 2002, but they have the option of borrowing additional money if there are funds left in the pool.
"The bond has a provision in it that if they pay it off, they can come back at any point and borrow against what they paid off, or more than that if other hospitals have paid their bonds and don't have a need," Batt says.
The access to capital comes amid a tough financing climate in the healthcare industry. Hospitals have suffered financially from reduced federal reimbursements, increased competition and excess capacity.
And credit-rating agencies have lost confidence in the healthcare industry, driving up the cost of financing. New York-based Moody's Investors Service, for instance, downgraded its ratings on the debt of 64 hospitals while upgrading only 14, Batt says.
For Edward Hospital, which will borrow $6.5 million from the pool, the money comes in handy for smaller projects, says Chief Financial Officer William Devoney.
"The pool allows us the flexibility to go in and finance small renovations or buy major pieces of equipment that normally we may finance commercially at higher interest rates," he says.