Skip to main content
Sister Publication Links
  • ESG: THE NEW IMPERATIVE
Subscribe
  • My Account
  • Login
  • Subscribe
  • News
    • Current News
    • COVID-19
    • Providers
    • Insurance
    • Government
    • Finance
    • Technology
    • Safety & Quality
    • Transformation
    • People
    • Regional News
    • Digital Edition (Web Version)
    • Patients
    • Operations
    • Care Delivery
    • Payment
    • Midwest
    • Northeast
    • South
    • West
  • Digital Health
  • Insights
    • ACA 10 Years After
    • Best Practices
    • Special Reports
    • Innovations
  • Data/Lists
    • Rankings/Lists
    • Interactive Databases
    • Data Points
  • Op-Ed
    • Bold Moves
    • Breaking Bias
    • Commentaries
    • Letters
    • Vital Signs Blog
    • From the Editor
  • 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 25 Innovators
    • Diversity in Healthcare
    • Women in Healthcare
    • - Luminaries
    • - Top 25 Diversity Leaders
    • - Leaders to Watch
    • - Luminaries
    • - Top 25 Women Leaders
    • - Women to Watch
  • Events
    • Conferences
    • Galas
    • Virtual Briefings
    • Webinars
    • Custom Media Event: ESG Summit
    • Transformation Summit
    • Women Leaders in Healthcare Conference
    • Social Determinants of Health Symposium
    • Leadership Symposium
    • Health Care Hall of Fame Gala
    • Top 25 Women Leaders Gala
    • Best Places to Work Awards Gala
    • Top 25 Diversity Leaders Gala
    • - Hospital of the Future
    • - Value Based Care
    • - Supply Chain Revenue Cycle
    • - Hospital at Home
    • - Workplace of the Future
    • - Strategic Marketing
    • - Virtual Health
  • Listen
    • Podcast - Next Up
    • Podcast - Beyond the Byline
    • Sponsored Podcast - Healthcare Insider
    • Video Series - The Check Up
    • Sponsored Video Series - One on One
  • MORE +
    • Advertise
    • Media Kit
    • Newsletters
    • Jobs
    • People on the Move
    • Reprints & Licensing
MENU
Breadcrumb
  1. Home
  2. Providers
May 17, 2017 01:00 AM

Fast cash handy for those hospital fixer-upper projects

Dave Barkholz
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print

    Hospital systems getting to long-overdue tower replacement projects and other capital needs are finding attractive interest rates on borrowings in the bond markets.

    MetroHealth System, a Cleveland-area county hospital with 50% of its patients in either Medicaid or uninsured, found so much investor appetite this month for an outsized $946 million bond offering that the competition for the bonds drove down the interest rate to less than 5%.

    "It's a great time to go to market," said Pierre Bogacz, managing partner of healthcare financial advisor HFA Partners in Tampa. Hospital bond offerings have exploded over the past year despite a little lull in January and February, Bogacz said.

    Chicago-based Presence Health was able to complete a $1 billion bond offering in August, despite severe operating losses that the system corrected just months before the issuance. The money was used to refinance older bonds, giving Presence Health the breathing room it needed to continue a turnaround that saw the system improve to break even six months after a $186 million operating loss in 2015, said CEO Mike Englehart.

    Both MetroHealth and Presence went into their offerings with bond ratings barely investment grade.

    Total hospital issuance of tax-exempt, fixed-rate revenue bonds has reached a pre-recession high of $27.7 billion in the 12 months ending June 30 with more than a month to go, HFA Partners found.

    That compares with a strong $21.1 billion in the previous 12 months and $20.5 billion in the period before that. By contrast, hospital issues totaled only $9.4 billion in the 12 months ended June 30, 2014.

    Bogacz said the market is being fueled by a convergence of investors chasing the fairly safe, solid returns that hospital bonds offer with hospitals shaking off the recession to raise capital for deferred maintenance and the ongoing patient shift in the industry to ambulatory care.

    Moreover, rates remain near historic lows, making it attractive to borrow now, he said. Highly-rated Kaiser Permanente, which carried an A+ rating into its recent bond offering, raised a record $4.4 billion in three simultaneous issuances at a stellar interest rate of 3.8%.

    At the other end of the scale, MetroHealth barely made investment grade of BBB and still fetched an interest rate a shade under 5%.

    That's a very favorable rate on a $946 million issue, showing that investors are fighting to get nominal yields above those offered by the safest county and municipal bonds, Bogacz said. The base rate for treasury bonds is about 3%.

    In addition to refinancing debt, hospital systems are going to the bond market to fund new projects, said Ryan Freel, senior vice president at healthcare financial advicing company Kaufman Hall & Associates.

    The physical plant of many hospitals is getting older, Bogacz said. Fitch Ratings in a September report noted that hospitals with lower bond ratings had seen the average age of their facilites grow from about 10.5 years in 2008 to 11.5 years in 2015 because they had put off replacing them. Growth plans from years ago, immediately after the boom of the Affordable Care Act are now being implemented.

    Bogacz said hospitals also might be motivated to do their bond issuance now before the healthcare market changes under a repeal of the ACA. How new legislation might affect patient volumes and interest rates gives some reason to take advantage now of the low rates.

    Freel said beyond financial uncertainty, many hospitals have been studying how quickly patient volumes were moving out of the hospital to ambulatory settings before spending big on new patient towers that might not be needed in the future.

    MetroHealth had four-to-five times as many bids for its bonds than the debt available to buy, said Dr. Akram Boutros, CEO of MetroHealth.

    But the system had to work overtime to justify its audacious issuance.

    MetroHealth is using the bulk of the money raised to build a 12-story, 270-bed modern hospital on its main campus to replace buildings that were 50 years to 100 years old, Boutros said.

    The heating system on the old campus is so old that MetroHealth is the only hospital in the U.S. that has a cold-weather plan to deal with the kind of frozen pipe breakage that caused major flooding of the hospital in the winter of 2014, he said.

    So when deciding that the time was right to raise the money for the replacement hospital, MetroHealth brought in a third-party accounting firm to thoroughly assess why the system needed the capital and detail its ability to pay the interest on the bonds, Boutros said.

    The former was easy to see. It was going to cost $1 billion over 10 years just to keep the old hospital operational, he said.

    The ability to pay was trickier. MetroHealth serves many of the poor in Cuyahoga County, generating 50% of its revenue from Medicaid and the uninsured, said Craig Richmond, chief financial officer. The county hospital gets just 3% of its funds from subsidies.

    But the system in 2016 was able to post adjusted earnings before interest, taxes, depreciation and amortization of $78 million on revenue of $1 billion.

    The third-party study, in part, made the case that MetroHealth could continue and build on that performance to allow it to more than cover the $64 million annual debt service on the new bonds, he said.

    Even still, the issue of $1 billion was so big that it brought down MetroHealth's bond rating from A- to BBB with a stable outlook on the new bonds, he said. Taking no chances, MetroHealth invited analysts from each of the big three bond-rating agencies to tour the campus and discuss management's vision.

    Maintaining investment grade on the issuance was a big deal. Many institutional investors won't buy high-yield or junk bonds.

    With the MetroHealth bonds still open to them, those investors overscribed the sale by 4-plus times, driving down the interest rate on the bonds to just below 5% from what the system felt would be closer to 5.25% or 5.5%, Boutros said.

    That demand will save MetroHealth about $50 million over the 40-year life of the bonds, Richmond said.

    The replacement hospital is scheduled to open in 2022 next to a new 85-bed intensive care unit tower that opened with operating room suites in July, Boutros said. MetroHealth used operating cashflow for the bulk of that $95 million ICU tower, he said.

    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
    CN_2021122p35_Smallhold Royal Trumpet Mushrooms 9.85_Buck Ennis_i.jpg
    Psychedelic therapy providers get creative as costs trip up patients
    Shafer Dr. David Shafer Clinic Botox cropped9.49.jpg
    A Botox boom for back-to-work
    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 © 1996-2022. Crain Communications, Inc. All Rights Reserved.
    • News
      • Current News
      • COVID-19
      • Providers
      • Insurance
      • Government
      • Finance
      • Technology
      • Safety & Quality
      • Transformation
        • Patients
        • Operations
        • Care Delivery
        • Payment
      • People
      • Regional News
        • Midwest
        • Northeast
        • South
        • West
      • Digital Edition (Web Version)
    • Digital Health
    • Insights
      • ACA 10 Years After
      • Best Practices
      • Special Reports
      • Innovations
    • Data/Lists
      • Rankings/Lists
      • Interactive Databases
      • Data Points
    • Op-Ed
      • Bold Moves
      • Breaking Bias
      • Commentaries
      • Letters
      • Vital Signs Blog
      • From the Editor
    • 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 25 Innovators
      • Diversity in Healthcare
        • - Luminaries
        • - Top 25 Diversity Leaders
        • - Leaders to Watch
      • Women in Healthcare
        • - Luminaries
        • - Top 25 Women Leaders
        • - Women to Watch
    • Events
      • Conferences
        • Transformation Summit
        • Women Leaders in Healthcare Conference
        • Social Determinants of Health Symposium
        • Leadership Symposium
      • Galas
        • Health Care Hall of Fame Gala
        • Top 25 Women Leaders Gala
        • Best Places to Work Awards Gala
        • Top 25 Diversity Leaders Gala
      • Virtual Briefings
        • - Hospital of the Future
        • - Value Based Care
        • - Supply Chain Revenue Cycle
        • - Hospital at Home
        • - Workplace of the Future
        • - Strategic Marketing
        • - Virtual Health
      • Webinars
      • Custom Media Event: ESG Summit
    • Listen
      • Podcast - Next Up
      • Podcast - Beyond the Byline
      • Sponsored Podcast - Healthcare Insider
      • Video Series - The Check Up
      • Sponsored Video Series - One on One
    • MORE +
      • Advertise
      • Media Kit
      • Newsletters
      • Jobs
      • People on the Move
      • Reprints & Licensing