The federal government is trying to make it easier for not-for-profit hospitals to refinance their tax-exempt debt by loosening a requirement to qualify for backing from the Department of Housing and Urban Development.
HUD loosens debt grip
Refinancing easier for not-for-profits
Hospitals that previously refinanced debt with insurance from HUD had to spend at least 20% of the loans on construction or equipment, though the agency set limits on the latter. Now the agency has waived the requirement, which may be good news for borrowers that sharply curbed or halted capital spending as the weak economy and unstable credit markets strained hospital balance sheets.
But federal officials, who pushed to adopt the change swiftly, also set more conservative financial terms for hospital borrowers that hope to refinance than for those that turn to the agency to insure new loans. The move by HUD is aimed at borrowers with variable-rate debt, and was first reported by Modern Healthcare in its coverage of the Healthcare Financial Management Association's 2009 Annual National Institute (modernhealthcare.com/section/liveat).
John Whitehead, policy and continuous improvement adviser with the HUD Office of Insured Health Care Facilities, said that the policy shift targets borrowers facing rising interest rates and with few options thanks to the credit crisis that erupted last fall.
The market for tax-exempt bonds sold to short-term investors was upended in early 2008 by credit market instability, and disruptions continue. Not-for-profit hospitals and health systems that issue such short-term debt—which featured fluctuating, but historically low, interest rates—typically rely on bond insurers or banks to guarantee borrowers' bonds for investors. But bond insurers' exposure to risky mortgages eroded their credit strength. That sent interest on some tax-exempt bonds soaring. Distress among banks has increased the risk of such backing for hospital bonds. Bonds guaranteed by a shaky bank may see interest rates spike or fail to attract investors.
HUD offers hospital borrowers an alternative source of highly-rated insurance to refinance debt as long-term bonds with fixed interest rates.
To be eligible for the agency's latest refinancing option, the interest rate on hospital debt must have climbed at least 1% since Jan. 1, 2008, or borrowers must prove such an increase is about to happen. Hospitals must also have an aggregate operating margin of 0.33% and average debt service coverage ratio of at least 1.8 for the past three audited fiscal years. However, HUD may calculate the terms using the projected interest rate after refinancing rather than borrowers' historical interest rate. Hospitals that apply for insurance to issue new debt must show operating margins of 0% and debt service coverage of 1.25.
Alan Richman, president and CEO of InnoVative Capital, a Springfield, Pa.-based healthcare finance company, said the terms “are designed to make people take pause.” The more stringent terms help to weed out struggling facilities from those crippled by the credit markets. “They're not looking for hospitals that have problems,” he said.
Whitehead said officials sought to avoid those with a high risk of default, he said, which could jeopardize the insurers' positive returns. Eligibility criteria represent the median operating margins and debt service coverage of hospitals insured by the agency. Whitehead said the agency also wanted to prevent a flood of applications that could overwhelm its resources. HUD adopted the change using a notice, which Whitehead said was an unusual but faster route. Agency officials will soon seek public comment on the change, though it has been adopted, he said.
HUD may eventually expand eligibility and officials will gain experience with credit-constrained hospitals, Whitehead said.
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