“We do have some concerns that an adverse ruling could result in many, many people losing their newly won health insurance,” said Martin Arrick, an analyst at Standard & Poor's. “But … general balance sheet strength has improved and keeps improving. And that provides some real cushion to providers.”
Over the past year, a loose lending environment has allowed hospitals and health systems to refinance debt, raise new capital and drive up deal prices for mergers and acquisitions. Low interest rates also gave struggling providers some breathing room, making it easier to service their variable rate debt. “The market is awash with liquidity,” said Rob Harris, a Nashville-based healthcare financing attorney at law firm Waller. “It will be there until there's a shock in the market.”
While the Federal Reserve has tried to tighten lending standards for commercial banks, the net effect has been the creation of a secondary market for nontraditional lenders such as hedge funds, business development corporations and specialty financing firms. With more money available, private-equity firms now can bid for takeover targets on a level playing field with corporations, which will ultimately increase deal valuations. “That's going to drive the market,” Harris said. “You're going to continue to see consolidation, divestitures and moving assets around.”
St. Joseph's/Candler in Savannah, Ga., has raised $35 million in new debt and refinanced $38 million in old debt through a mix of taxable and tax-exempt financings. But Gregory Shaack, the system's chief financial officer, said his two largest concerns for 2015 center around reimbursement, particularly in a state that hasn't expanded Medicaid.
“It's going to continue to be ratcheted down,” he said.
The two-hospital system's other concern is preparing to participate in new value-based payment models, such as the CMS' accountable care organizations, by Jan. 1, 2016. It's working on creating a physician network. “Until we have an organization where all the doctors are working toward the same goal, it's probably not going to work,” Shaack said.
Small community banks, meanwhile, have demonstrated a greater willingness to partner with large banks, which has injected funds into rural markets. “Banks have had a great 2014 with regard to community projects,” said Steven Kennedy, a Columbus, Ohio-based managing director at investment bank Lancaster Pollard.
Absent a global or political crisis, financing experts don't foresee much on the horizon that could deliver a jolt to the lending market. The one exception would be rising interest rates—but when and how high rates might rise are anyone's guess. And, as Kennedy noted, interest rates on 10-year Treasury notes decreased in December to some of their lowest rates of the year.
While most large health systems should be able to weather a modest increase in interest rates, even a slight hike would test smaller hospitals. “These small stand-alone hospitals are living really close to the edge,” said Denise Burke, a Memphis, Tenn.-based regulatory attorney at Waller. “Even small changes correlate into layoffs (and) service closures.”
When interest rates are low, providers with floating-rate notes get a bit of relief. But when interest rates go up, the opposite is true: Borrowers have a harder time meeting their debt obligations. “Even a half-a-point bump might have grave effect,” said Mark Claster, partner at Carl Marks Advisors.
“You have a group of not-for-profits that are struggling and then you have health systems that are very bankable,” said John Tishler, another Nashville-based financing attorney at Waller. It's “a situation of haves and have-nots.”