(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.