Skip to main content
Subscribe
  • Sign Up Free
  • Login
  • Subscribe
  • News
    • Current News
    • Providers
    • Insurance
    • Government
    • Finance
    • Technology
    • Safety & Quality
    • Digital Health
    • Transformation
    • ESG
    • People
    • Regional News
    • Digital Edition (Web Version)
    • Patients
    • Operations
    • Care Delivery
    • Payment
    • Midwest
    • Northeast
    • South
    • West
  • Opinion
    • Bold Moves
    • Breaking Bias
    • Commentaries
    • Letters
    • Vital Signs Blog
    • From the Editor
  • Events & Awards
    • Awards
    • Conferences
    • Galas
    • Virtual Briefings
    • Webinars
    • Nominate/Eligibility
    • 100 Most Influential People
    • 50 Most Influential Clinical Executives
    • Best Places to Work in Healthcare
    • Excellence in Governance
    • Health Care Hall of Fame
    • Healthcare Marketing Impact Awards
    • Top 25 Emerging Leaders
    • Top Innovators
    • Diversity in Healthcare
      • - Luminaries
      • - Top 25 Diversity Leaders
      • - Leaders to Watch
    • Women in Healthcare
      • - Luminaries
      • - Top 25 Women Leaders
      • - Women to Watch
    • Digital Health Transformation Summit
    • ESG: The Implementation Imperative Summit
    • Leadership Symposium
    • Social Determinants of Health Symposium
    • Women Leaders in Healthcare Conference
    • Best Places to Work Awards Gala
    • Health Care Hall of Fame Gala
    • Top 25 Diversity Leaders Gala
    • Top 25 Women Leaders Gala
    • - Hospital of the Future
    • - Value Based Care
    • - Hospital at Home
    • - Workplace of the Future
    • - Digital Health
    • - Future of Staffing
    • - Hospital of the Future (Fall)
  • Multimedia
    • Podcast - Beyond the Byline
    • Sponsored Podcast - Healthcare Insider
    • Video Series - The Check Up
    • Sponsored Video Series - One on One
  • Data Center
    • Data Center Home
    • Hospital Financials
    • Staffing & Compensation
    • Quality & Safety
    • Mergers & Acquisitions
    • Data Archive
    • Resource Guide: By the Numbers
    • Surveys
    • Data Points
  • Newsletters
  • MORE+
    • Contact Us
    • Advertise
    • Media Kit
    • Jobs
    • People on the Move
    • Reprints & Licensing
MENU
Breadcrumb
  1. Home
  2. Providers
March 15, 2014 01:00 AM

Hospitals and lenders see favorable conditions now for seeking financing

Beth Kutscher
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Avera's Floyd Valley Hospital will break ground next month in Le Mars, Iowa.

    (This article has been updated with a correction.)

    Until recently, leaders of Avera Health, a 31-hospital not-for-profit system based in Sioux Falls, S.D., were holding on to capital rather than raising and spending it for new projects, given the overall industry uncertainty surrounding healthcare reform.

    That has changed this year. Over the next three months, Avera is undertaking five projects in four of its markets, including replacing long-term care, outpatient care and clinic facilities. It anticipates spending $77 million, and is currently weighing its options for a $60 million bond issuance.

    The system is looking at a number of financing options for its current projects, including direct placement with larger banks, fixed- and variable- rate bonds and a 30-year tax-exempt bond issue. James Breckenridge, the system's senior vice president of finance, said he expects a public offering would be sold in a matter of hours. “Right now, the appetite for tax-exempt financing is really high,” he said. The number of healthcare facilities coming to market has been limited in recent years. But “banks have money and they're eager to lend it,” he said.

    The implementation of the Patient Protection and Affordable Care Act created hesitation for many hospitals and systems, which have been holding on to cash while they consider where it might best be deployed. But the relatively low cost of borrowing, coupled with expectations that interest rates are likely to climb in the next year or so, has providers—even those who aren't yet ready to launch new projects—taking another look at the capital markets. Those that are wading in are finding a healthy demand among lenders.

    Although taking on more debt can increase leverage for providers, many of the investment-grade borrowers in the market have the wherewithal to manage higher debt burdens. In addition, lower interest rates could mean better cash flow if existing debt is refinanced.

    MH Takeaways

    Stronger systems are borrowing and “warehousing” their money, putting more money on their balance sheets this year while interest rates are still low.

    Many stronger healthcare providers are borrowing and “warehousing” the money, said Michael Hammond, a principal at Hammond Hanlon Camp, an advisory and investment banking firm. Clients with multiyear capital plans are putting more money on their balance sheets this year while interest rates are still low. “Rather than waiting for some project to borrow money, you might as well borrow now,” he said. “If you think about the cost of money now, it's probably the cheapest form of capital, rather than using your own funds.”

    Investment bankers say the time to borrow is now. “In general, economists think that rates will continue to increase over the next few years,” said Steven Kennedy, managing director at Lancaster Pollard, an investment banking firm. “However, the first quarter so far has been a breath of fresh air for healthcare borrowers.”

    Lawrence General Hospital in Massachusetts is financing a multiyear master facilities plan and intends to use the proceeds from this year's $45 million, fixed-rate bond issuance to fund $17 million in renovations to its patient floors and three years of routine capital expenditures. The debt issuance will fund the first phase of what will ultimately be a $127 million project that will allow the hospital to provide better access and service capabilities, according to a report from Fitch Ratings, which rated the bonds BBB. Lawrence General did not provide comment for this article.

    Worries that borrowing costs would rise came to a head at the end of 2013 when the Federal Reserve announced it would “taper” its debt buyback program, known as quantitative easing. The news came as interest rates on 10-year Treasury yields had already edged up about 100 basis points over the summer. In addition, all three credit ratings agencies delivered a negative outlook on the not-for-profit healthcare sector.

    Healthcare providers had been actively refinancing debt over the past few years as interest rates fell to historic lows. That activity continues, but there are signs it may be slowing. Even last year's modest rate increase of 100 basis points for 10-year Treasury yields has dampened refinancing deals, said Allen Robertson, a Charlotte, N.C.-based finance attorney at Robinson Bradshaw & Hinson.

    Experts say capital spending has not returned to its pre-recession levels, as financial executives hold on to cash while waiting to see what volume, utilization and bad debt will look like under healthcare reform's insurance expansion. But the pullback on healthcare spending during the past few years—particularly on traditional brick and mortar building projects—has created pent-up demand among lenders. Municipal bond investors, spooked by Detroit's bankruptcy and Puerto Rico's financial woes, are looking at healthcare as a potentially safer bet, particularly as higher federal income tax rates for more affluent taxpayers have made tax-exempt bonds more attractive.

    Avera Health anticipates spending $77 million on five projects.

    Opportunities for borrowers

    That supply and demand mismatch is creating opportunities for healthcare borrowers. “You also have a very attractive bond market still,” Hammond said. “Interest rates are unusually low. Healthcare credits are holding up relatively well. If you need to borrow money, this is an attractive time to do it.”

    Lower-rated investment grade credits seem to have benefited the most from the mismatch. In March 2013, when the 10-year Treasury was trading at just over 2%, A-rated credits saw yields of 3.4% while BBBs saw 4.3%. This year, with Treasury bonds closer to 3%, A-rated yields have risen to 4.5%, but BBB to only 5%, Kennedy said.

    For lenders, the healthcare industry presents opportunities because it generates good cash flow and because healthcare services will be in continued demand, thanks to aging baby boomers, said Dan Chapa, CEO of Healthcare Finance Group, a lender that focuses on the middle market, meaning companies with less than $750 million in annual revenue. “We have seen a lot of activity just in working capital needs,” he said. “Those types of activities are creating more demand for debt capital. We think it's going to open up opportunities for us.”

    Borrowers are expected to deploy capital primarily on acquisitions, particularly those that require significant capital up front, such as physician practice purchases, Kennedy said. They will also continue to make capital expenditures that emphasize outpatient over inpatient care.

    And even though many hospital systems are looking at looser, non-ownership agreements, the perennial dealmakers are still buying. HFG holds a significant portion of the debt issued by Prime Healthcare Services, an investor-owned hospital chain based in Ontario, Calif., whose strategy has focused on turning around struggling community hospitals. In December, HFG closed a five-year, $475 million financing for Prime, consisting of a $225 million revolving line of credit and a $250 million term loan, which will be used for acquisitions. “We have a lot of confidence in the management team and we have watched their operations grow very quickly,” Chapa said.

    Tenet Healthcare Corp., Dallas, announced this month that it is issuing $600 million in five-year notes at a 5% interest rate. With interest rates as low as they have been, Tenet is prefunding an acquisition and repaying debt from its revolving credit facility, said Tenet CEO Trevor Fetter. “I think it's a uniquely great time to access the capital markets,” he said.

    HCA, the Nashville-based hospital chain, also undertook a debt refinancing this month, issuing $1.5 billion in 3.75% notes maturing in 2019 and

    $2 billion in 5% notes maturing in 2024. The company will use the proceeds to refinance $1.5 billion in 8.5% debt due in 2019 and $1.25 billion in 7.875% notes due in 2020. Analysts expect HCA to use the funds for share repurchases or possibly acquisitions.

    If lenders have any reservations about lending, those qualms center on smaller hospitals that have struggled to remain in the black. “I think what you've seen in the industry is that it's a continuing differential between and haves and have-nots,” Hammond said. Some smaller facilities, particularly in rural areas, have been able to tap into government programs to finance their projects.

    Avera's Floyd Valley Hospital, a 25-bed critical-access facility in Le Mars, Iowa, will break ground next month on a $27 million expansion and renovation project. It is currently operating with 1970s infrastructure, including outdated operating rooms, a physician clinic that isn't connected to the main hospital and MRI services housed in a trailer, said Daryl Friedenbach, director of fiscal services.

    Prince of Peace is the new long-term-care project that Avera is building as part of five projects it is financing in four markets.

    Bank deals

    The building project will modernize its surgical and radiology departments, add square footage and create a new physician office building that will be connected to the main campus, which Freidenbach said will help with physician recruitment.

    Avera was able to take advantage of the U.S. Department of Agriculture Community Facilities Program to obtain a $15.7 million direct loan for the project, and also secured a 3.5%, 35-year loan with local and regional banks.

    “The smaller community hospitals are probably more likely to do bank deals,” Robertson said. “That's still attractive and available at this point.”

    Avera, which has refinanced some of its own debt, is now thinking about long-term projects. The system last year received a ratings upgrade from Standard & Poor's and now is rated AA- credit. However, Avera's Breckenridge said he does not believe the negative outlook on the hospital sector should have any impact on its ability to access the capital markets.

    “We think the margins will be compressed, but (healthcare) will continue to be a strong sector overall,” he said. “We've held capital just like everyone else. But we're looking toward the future.”

    Follow Beth Kutscher on Twitter: @MHbkutscher

    (This article has been updated to correct the amount Avera Health plans to spend on its five projects.)

    Letter
    to the
    Editor

    Send us a letter

    Have an opinion about this story? Click here to submit a Letter to the Editor, and we may publish it in print.

    Recommended for You
    finance graphs hospital
    Primary care physicians' pay growth picked up in 2022: MGMA
    Home cancer treatment faces challenges post-pandemic
    Home cancer treatment faces challenges post-pandemic
    Most Popular
    1
    More healthcare organizations at risk of credit default, Moody's says
    2
    Centene fills out senior executive team with new president, COO
    3
    SCAN, CareOregon plan to merge into the HealthRight Group
    4
    Blue Cross Blue Shield of Michigan unveils big push that lets physicians take on risk, reap rewards
    5
    Bright Health weighs reverse stock split as delisting looms
    Sponsored Content
    Modern Healthcare A.M. Newsletter: Sign up to receive a comprehensive weekday morning newsletter designed for busy healthcare executives who need the latest and most important healthcare news and analysis.
    Get Newsletters

    Sign up for enewsletters and alerts to receive breaking news and in-depth coverage of healthcare events and trends, as they happen, right to your inbox.

    Subscribe Today
    MH Magazine Cover

    MH magazine offers content that sheds light on healthcare leaders’ complex choices and touch points—from strategy, governance, leadership development and finance to operations, clinical care, and marketing.

    Subscribe
    Connect with Us
    • LinkedIn
    • Twitter
    • Facebook
    • RSS

    Our Mission

    Modern Healthcare empowers industry leaders to succeed by providing unbiased reporting of the news, insights, analysis and data.

    Contact Us

    (877) 812-1581

    Email us

     

    Resources
    • Contact Us
    • Advertise with Us
    • Ad Choices Ad Choices
    • Sitemap
    Editorial Dept
    • Submission Guidelines
    • Code of Ethics
    • Awards
    • About Us
    Legal
    • Terms and Conditions
    • Privacy Policy
    • Privacy Request
    Modern Healthcare
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • News
      • Current News
      • Providers
      • Insurance
      • Government
      • Finance
      • Technology
      • Safety & Quality
      • Digital Health
      • Transformation
        • Patients
        • Operations
        • Care Delivery
        • Payment
      • ESG
      • People
      • Regional News
        • Midwest
        • Northeast
        • South
        • West
      • Digital Edition (Web Version)
    • Opinion
      • Bold Moves
      • Breaking Bias
      • Commentaries
      • Letters
      • Vital Signs Blog
      • From the Editor
    • Events & Awards
      • Awards
        • Nominate/Eligibility
        • 100 Most Influential People
        • 50 Most Influential Clinical Executives
        • Best Places to Work in Healthcare
        • Excellence in Governance
        • Health Care Hall of Fame
        • Healthcare Marketing Impact Awards
        • Top 25 Emerging Leaders
        • Top Innovators
        • Diversity in Healthcare
          • - Luminaries
          • - Top 25 Diversity Leaders
          • - Leaders to Watch
        • Women in Healthcare
          • - Luminaries
          • - Top 25 Women Leaders
          • - Women to Watch
      • Conferences
        • Digital Health Transformation Summit
        • ESG: The Implementation Imperative Summit
        • Leadership Symposium
        • Social Determinants of Health Symposium
        • Women Leaders in Healthcare Conference
      • Galas
        • Best Places to Work Awards Gala
        • Health Care Hall of Fame Gala
        • Top 25 Diversity Leaders Gala
        • Top 25 Women Leaders Gala
      • Virtual Briefings
        • - Hospital of the Future
        • - Value Based Care
        • - Hospital at Home
        • - Workplace of the Future
        • - Digital Health
        • - Future of Staffing
        • - Hospital of the Future (Fall)
      • Webinars
    • Multimedia
      • Podcast - Beyond the Byline
      • Sponsored Podcast - Healthcare Insider
      • Video Series - The Check Up
      • Sponsored Video Series - One on One
    • Data Center
      • Data Center Home
      • Hospital Financials
      • Staffing & Compensation
      • Quality & Safety
      • Mergers & Acquisitions
      • Data Archive
      • Resource Guide: By the Numbers
      • Surveys
      • Data Points
    • Newsletters
    • MORE+
      • Contact Us
      • Advertise
      • Media Kit
      • Jobs
      • People on the Move
      • Reprints & Licensing