Not-for-profits in their sights? Moody’s: Chains could make plays; others disagree

Moody’s Investors Service believes that investor-owned chains could make a meal of cash-strapped not-for-profits this year, but two transactions advisers cautioned that the chains seem more likely to hoard their finances. In a recent report, Moody’s said that hospitals and systems that can’t access tax-exempt debt markets could decide to seek a buyer. The high cost and lack of tax-exempt financing that plagued 2008 already have restricted capital spending on medical equipment, Moody’s said. Providers also have been hit hard by plummeting investment returns, especially those that have invested in equities or alternative investments such as hedge funds, the ratings agency said. In contrast, Moody’s suggested that for-profit chains still have access to more debt, mostly in the form of unused capacity in bank credit facilities agreed to well before the debt markets seized up (Nov. 3, 2008, p. 32). Some of these companies also have been building up cash in order to repay debt ahead of schedule, Moody’s said. Either of these sources could be tapped to fuel acquisitions, and then offset by lowered capital spending and further cost-cutting, Moody’s added. Trey Crabb is not so sure that the investor-owned companies will be willing to part with their liquidity. Crabb recently left Avondale Partners to head up a new Nashville office for Stroudwater Associates, a healthcare advisory firm based in Portland, Maine. Right now, Crabb added, there aren’t many deals in the works, although he believes that there are more conversations taking place between not-for-profits that could combine in a noncash deal. “If the credit markets loosen up next year, then I believe (mergers-and-acquisitions) activity certainly could increase from where it is today, but it doesn’t look like it is going” to loosen up in the first half of the year, Crabb said. Part of the problem is that sellers haven’t adjusted their expectations for what they can receive in a sale of their assets, he added. Josh Nemzoff, a transaction consultant and president of Nemzoff & Co., New Hope, Pa., expects dealmaking to pick up in 2009, but doesn’t believe that the for-profit chains will lead the charge. “They are taking a bunker mentality: Let’s keep our powder dry and see what happens with things before we spend on anything,” Nemzoff said. Nemzoff, too, thinks that deals between not-for-profits could increase because they can avoid the debt markets. When a for-profit is buying a not-for-profit, the not-for-profit’s debt must be defeased, or paid off early, whereas if another not-for-profit is the acquirer, that debt can be assumed by the acquirer, Nemzoff said. <<