A proposal by President Barack Obama to subsidize lending costs for not-for-profit hospitals may help larger hospitals but not smaller ones, say healthcare finance insiders.
Building on Build America
But small hospitals might not benefit: experts
Obama’s 2011 budget, proposed this month, would expand and extend a popular subsidy for states, counties and other government borrowers that issue taxable debt known as Build America Bonds. Created under the American Recovery and Reinvestment Act of 2009, also known as the stimulus law, the bonds were designed to ease credit as markets reeled from the financial system’s near collapse the prior year.
Under the president’s proposal, Build America Bonds would become permanent and eligibility would be extended to include private not-for-profits, including hospitals, but the interest subsidy would be reduced to 28% from 35%, the Treasury Department said.
Opening up the subsidies for taxable debt to the nation’s not-for-profit hospitals won support from state health finance authorities, which bring bonds to market for tax-exempt healthcare borrowers.
But officials would like to see a similar reprieve for another short-term fix to stressed credit markets in the stimulus law that gave banks a financial incentive to buy tax-exempt bonds, which in turn made it easier for not-for-profit hospitals to borrow.
“We definitely think it needs strong consideration for extension or permanence,” said Larry Nines, executive director of the Wisconsin Health and Educational Facilities Authority, of the provision, which gives banks additional tax breaks of up to $30 million per tax-exempt borrower (June 1, 2009, p. 30).
The Wisconsin authority has handled 14 such deals since the stimulus law raised the limit for banks to qualify for the tax break. Previously, the limit was $10 million for each city, county or state authority, also known as issuers, which sharply limited the supply of the so-called bank-qualified debt because many borrowers often go to market through a single issuer.
Nines said bank-qualified bonds issued by his Wisconsin authority have been deals largely for less than $15 million between smaller borrowers and their local banks. “But in every instance, a more cost-effective financing was done, and the rates and terms are more beneficial and cost-effective than alternatives,” he said.
Chuck Samuels, counsel for the National Association of Health and Educational Facilities Finance Authorities, said the bank-qualified bond incentive has helped small or financially weaker hospitals gain access to capital at more favorable interest rates than those available from other investors. Such borrowers seeking such small loans won’t likely have the size or credit strength to attract the foreign investors or pension funds in the taxable Build America Bonds market, he said. Local banks eligible for the bank-qualified incentives are more likely to make an investment in nearby hospitals. “We’re very supportive” of continuing the Build America Bonds, Samuels said, but he argued that extending the bank-qualified provisions would be more significant to more hospitals.
David Cyganowski, managing director and healthcare investment banking co-head for Citigroup, said Obama’s proposal would expand an already healthy market for not-for-profit healthcare borrowers. He noted that long-term investors have been significant buyers of Build America Bonds, a sign of stability for the market. He said that strongly rated and well-known not-for-profit health systems are likely to benefit directly from access to the Build America Bonds market under the president’s proposal.
The Build America Bonds have been more popular than expected and helped improve borrowing terms for hospitals and health systems as 2009 progressed by siphoning off some municipal bond supply, creating demand for hospital municipal issues. Since April 2009, roughly one-fifth of all municipal bonds have been issued as taxable Build America Bonds, the Treasury reported, based on reports from Bloomberg. Through the end of January, government borrowers have issued 834 Build America Bonds for a total of $70.8 billion.
University of Utah Hospitals and Clinics twice issued Build America Bonds last year after attractive interest rates for a deal to finance expansion of its cancer hospital last September prompted the health system to seek more capital in December, said Gordon Crabtree, the system’s chief financial officer. “We were just anxious to get the next one done as quickly as we could,” he said. The university issued tax-exempt and Build America Bonds, depending on which market offered the most attractive interest rates, Crabtree said. December’s debt included roughly $40 million of Build America Bonds and $10 million sold to tax-exempt investors.
The mix of taxable subsidized bonds and tax-exempt debt is projected to save the system $300,000 in debt service costs annually on December’s 20-year bond, which will finance a strategic 64-bed expansion of the system’s psychiatric services in a bid to stop losing money on specialty care by achieving more economy of scale, Crabtree said.
Lisa Harris, the CEO and medical director for 328-bed Wishard Health Services, said she supports an extended Build America Bonds program. The Indianapolis hospital will finance an ambitious replacement of its aging campus in part with Build America Bonds. “We are in a rapid state of physical decline,” she said of Wishard’s 17-building campus, which includes one facility constructed in 1914.
The safety net hospital will borrow $660 million of the project’s $754 million cost and recently issued $195 million worth of debt, of which $154.2 million was Build America Bonds. Dan Sellers, Wishard’s chief financial officer and treasurer, said the subsidy helped lower the overall interest rate on the $195 million to 3.835%. He hopes to return to markets at the end of the month with another $466 million with equal success, he said.
Wishard first moved to start its construction as credit markets collapsed and construction costs soared in 2007 and 2008. Officials felt pressed to push the project forward after estimating delays would add $53 million per year to the project. Times have changed, as construction costs and interest rates have declined, creating a new sense of urgency for the project, Harris said. She said that Wishard sought to take advantage of the Build America Bonds before the interest subsidy ended. “There isn’t a better time,” she said. “It’s the exact right time to do this.”
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