Capital Markets Update and Implications

Transcription

1 Capital Markets Update and Implications 4 th Illinois HFMA Treasury Program Chicago, IL / December 15, 2011 Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 1

2 Agenda Big Picture Perspective Hospital Capital Markets Update Final Thoughts Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 2

3 Big Picture Perspective Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 3

4 Capital Markets Assumptions Have Transformed Illinois HFMA Treasury Program Capital access no longer a given for every credit and every project New era capital market expectations are evolving while the environment is subject to market-wide on and off again volatility Creditworthiness matter more than ever (unlike pre-2008) Driver of capital access, product availability, costs and terms Key market indicator of long-term organizational capability and durability, especially during challenging times Attractiveness to potential partners (consolidator vs. consolidatee) Fixed-rate bonds are the sole form of fully committed capital, but access, costs and terms have fluctuated wildly since 2008 LOC-backed variable-rate debt is largely uncommitted capital with considerable and unpredictable event risk Bank direct lending only mitigates some of the key risks When push comes to shove, you can t expect the market to provide a reliable backstop to your capital structure under all circumstances Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 4

5 Unsettling Potential Capital Market Wild Cards in the New Economy 1. Deepening recession vs. pronounced inflation viewpoints 2. Short-term Fed policy leading into an election year 3. International economy melt downs 4. Saturation of long-term Treasury bond issuance pushing up rates 5. Another severe capital markets dislocation/ liquidity crisis 6. Another bank industry collapse (e.g., commercial real estate, credit card debt, etc.) 7. Healthcare industry reform realities turning off investors 8. Healthcare industry sector saturation as more borrowers issue fixedrate debt and buyers get full up on healthcare allocation 9. Hospital bankruptcy announcements shaking investor confidence in the industry (e.g., AHERF in the 90s) 10. More confidence in equities, real estate, or commodities shifting money out of tax-exempt bonds Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 5

6 Given heightened risk awareness across the spectrum, capital management strategies and tactics are transitioning Pre-2008: Era of the Deal 2008 to 2010: Broken Deal Reactive Fixes ?: Evolving enterprise risk management leading to more thoughtful decision making Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 6

7 Identifying Risk Entry Points Financial Covenants CAPITAL STRUCTURE Counterparty Exposure Cost of Capital Allocation Facilities Planning Capital Spending Governance/ Approval Liability Portfolio Credit/ Liquidity Provider Business Strategy Debt/ Swap Management STRATEGY/ OPERATIONS Brand Leases Investor Relations Risk Capacity ISTFP Asset Portfolio IT Management Cost Structure Clinical Integration/ Physician Alignment Capital Allocation Liquidity Credit Rating Compensation Management Market Access Patient Volumes Put/ Event Risk Tax Exemption Tax Exempt Status Ratio Exposure Risk Premiums Insurance Shortfall Clinical Transformation Changing Business Model HC Reform Inflation/ Deflation Service Line Distribution MACROECONOMIC/ HEALTCHARE INDUSTRY Interest Rates State/ Federal Budget Pressures Energy Natural Disasters Commodity Prices Capital Markets Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 7

8 Optimizing Internal Risk Tolerance vs. Expected Risk Exposure Internal Risk Tolerance/ Capacity How much capital capacity do we need to support the key strategic initiatives? What level of liquidity and balance sheet flexibility do we need to withstand potential shocks? How constrained will the organization be to react to new opportunities and challenges as capital is deployed to pre-existing initiatives? Probability and Magnitude of Risks How likely is the change in competitive or operating environment? How quickly will the change occur? What will be the magnitude of the impact to the organization? What levers are available to manage necessary margin should such downside shocks occur? What confidence level exists in executing on the current projections? Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 8

9 Evolution to The Integrated Strategic, Treasury and Financial Plan Market Strategies Service line initiatives Geographic presence Physician strategies Site-specific volume and revenue projections Facilities Management Facility investments Equipment investments Information technology Operational Strategy Care delivery model Process optimization Throughput productivity New technology impact Financial Investments Return expectations Volatility, liquidity, and counterparty risks Infrequent events Debt and Swap Strategy Debt, swap, and lease risks Market access Capital Market Strategy Defined Benefit Pension Plan Market reliance management Global Constraints Philosophy/ Policy Financial Targets Strategy Flexibility Credit Rating External Risks Mission-Based Strategy Financial Planning Treasury Strategy Annual Budget Capital Allocation Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 9

10 Integrated Planning: Do You Have Good Answers to These Questions? Strategic Planning What s required to compete in the market and why? How does your strategy relate to new era core competencies and changes to the business model? How much change is required and by when? How much will it cost? How will competitors react? Are you prepared to do what s necessary? Can you do it alone? Financial Planning Can you afford your strategic plan within an acceptable credit and execution risk context? What if you're wrong then what? Is it too risky? Capital Allocation How much should you spend? Is spending focused at the right strategies? What is the risk adjusted discounted cash flow return of the portfolio? Is actual vs. projected performance measured? Capital Structure What is the right amount, mix, structure and cost of debt and equity? Do you know how much risk you re really taking? What contingency plans are in place on uncommitted debt? Budgeting/ Reporting Do you have the tools and process to deliver a credible budget tied to your strategic financial plan? Is it achievable? Is there accountability for results? What if you fall short? Then what? Exit Rules/ Options Which strategies, services, facilities, or capital structure products? Under what conditions? How? Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 10

11 Hospital Capital Markets Update and Implications Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 11

12 Primary Capital Sources: No One Size Fits All and No Free Lunch 1. Variable-rate demand bonds supported by a commercial bank letter of credit or own credit/ self liquidity 2. Public market fixed-rate bonds (own credit or insured by HUD/FHA or USDA) 3. Private placements 4. Direct bank lending (bank or non-bank qualified, fixed or variable) 5. Capital/ operating leasing 6. Asset monetization/ developer-funded structures 7. Operations 8. Working capital management (A/R reduction and A/P extension) 9. Outside support: grants, philanthropy, new payor models, local government tax support, etc. 10. Capital investment deferral, downsizing, and/or elimination 11. Outside capital partner (merger, joint venture, private equity, etc.) 12. Other Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 12

13 Fixed Rate Market: MMD Benchmark Index and Credit Spreads Municipal Market Data ( MMD ) decreased 97 bps since the start of % Healthcare Credit Spreads 'AA', 'A' and 'BBB' Healthcare Credit Spreads over MMD 'AAA' Benchmark Index 30Y AA Spread 30Y A Spread 30Y BBB Spread Credit spreads to MMD have stabilized, but remain well above average Credit Spread to MMD Index 4% 3.5% 3% 2.5% 2% 1.5% 1% 0.5% 0% Source: MMD Index, Thomas Reuters. As of 11/28/2011. Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 13

14 Long-Term, Fixed-Rate Investors Remain Cautious Price discovery less of a concern now with more supply Illinois HFMA Treasury Program 30-year fixed rate access, costs and terms highly dependent on overall muni fund flows, state tax advantages and intrinsic hospital creditworthiness AA : 5.15%+ A : 5.60%+ BBB : 6.25%+ Underlying credit/ market fundamentals matter most, so expect to speak with buyers more diligently looking for highly rated, wellpositioned, long-term market-winning borrowers Extended pre-marketing period (full one to two weeks) Investor calls and possibly in-person investor meetings/ road shows, depending on credit Bank covenants (LOC and direct lending) surfacing in investor calls Heightened review of bond docs, Appendix A and credit reports Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 14

15 Variable Rate Market Remains Very Low Cost with Stabilized Commercial Bank Access At Least for Now Public, tax-exempt, variable rate market remains at all time lows Market access/ cost historically tied to commercial bank letter of credit availability, cost and bank rating Borrower takes responsibility for risks: interest rate, investor put, borrower downgrade, bank downgrade, tax, hospital rating downgrade, etc. Considerable market and credit support uncertainty exists Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 15

16 Access to Bank Letters of Credit Remains Okay for Now, but Expect Current relationship bank(s), if highly rated, will likely be your best partner One-off lenders to non-comprehensive clients are infrequent/unreliable Pending regulations and other factors affect bank LOC appetite Increased bank reserve requirements affecting access, terms and costs Push towards direct lending, but renewability a question Restrictive and highly negotiated covenants, security, and termination provisions Be mindful of borrower rating (e.g., A- ) downgrade termination triggers Material Adverse Event language creates an easy out for the banks Change in Regulation language preserve a bank option to increase costs Annual evergreen renewal provisions can prove helpful Insist on real term-out provisions in the event of remarketing failure: 3-5 yrs Possible subjective consent provisions (e.g., issuing new debt, asset disposition, mergers, joint ventures, sale/ lease back, etc.) Significant tie-in with other commercial banking services a given Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 16

17 Direct Bank Lending Rising, But it is Not Committed Capital Illinois HFMA Treasury Program How do bank loans work? Direct bank loans have become increasing popular given the decreased number of LOC banks and increased number of borrowers that are converting VRDBs to fixed rate; these facilities are bonds that are directly bought and held by the bank What are the typical terms? Bonds are usually sold with a long-term maturity and have a renewal 3 to 7 years out; these facilities are priced at a spread to LIBOR, adjusted by applying a tax factor (i.e., 74% of LIBOR + credit spread); Spreads are dependant on the credit of borrower and the appetite of direct lending for each bank Advantages + Generally no rating needed + Hospital public disclosure/appendix A not required + Competitive pricing (similar to LOC) + Eliminates the daily/ weekly put risk associated with VRDBs + No debt service reserve fund + Better hedge with % LIBOR swaps Disadvantages and risk factors Put feature is essentially the term of the loan Bank establishes its own covenants Banks require tie-ins to other commercial business (could be significant) Retain variable rate and bank renewal risk Change in regulation circuit breaker Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 17

18 Key Financing Product Cost and Risk Summary AA Fixed Rate A Fixed Rate BBB Fixed Rate LOC-Backed Variable Rate Bonds AA Own Credit/ Liquidity Variable Notes Direct Bank Lending 30-Year Bond Yield 5.15% 5.60% 6.25%+ SIFMA, wkly SIFMA, wkly n.a. Letter of Credit n.a. n.a. n.a. 0.90%, 3 years n.a. n.a. Bank Lending Rate n.a. n.a. n.a. n.a. n.a. 74% 1M Libor +90 bps) Annual Remarketing n.a. n.a. n.a. 0.10% 0.10% n.a. Cost of Capital 5.15% 5.60% 6.25%+ SIFMA % SIFMA % Risks 74% 1M Libor + 90 bps Put Risk No No No Yes Yes (self funded) No Bank Renewal Risk No No No Yes No Yes Rollover Risk No No No Yes Yes Yes Credit Enhancer Risk No No No Yes Own rating No Interest Rate Risk No No No Yes Yes Usually Tax Risk No No No Yes Yes Depends Borrower Downgrade No No No Yes Yes Yes Reserve Fund No Maybe Yes No No No Mortgage No Maybe Yes No No No Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 18

19 Final Thoughts Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 19

20 Consistent Themes Across Hospital Capital Management Strategies Protect credit ratings Manage organization-wide risk Balance global capital strategy Diversify (products, providers, risks, etc.) Anticipate municipal capital market volatility Consider banking market volatility Incorporate leasing as a balance sheet borrowing strategy Integrate strategic, financial and treasury management planning Copyright 2011 Kaufman, Hall & Associates, Inc. All rights reserved. 20

21 Rush University Medical Center Obligated Group Debt Management in the Best & Worst of Times December 2011 Patricia S. O Neil Treasurer & Chief Investment Officer

22 Members of the Rush Obligated Group Rush University Medical Center has been part of the Chicago landscape for more than 170 years. RUMC includes: 664 staffed bed academic medical center serving adults and children Health sciences university with over 1,900 students and $126 million in annual research expenditures Rush University Medical Group with 405 employed physicians across multiple specialties Over 660 medical residents 22

23 Members of the Rush Obligated Group Rush Copley Medical Center (located in Aurora, IL) 193 staffed bed community hospital Employed medical group with 42 physicians Expansion to Yorkville, IL: $48 million second campus with new urgent care and outpatient center (opened July 2008) and freestanding emergency center (to open in 2012) Rush Oak Park Hospital (located in Oak Park, IL) 128 staffed bed community hospital Employed medical group with 40 physicians 23

24 Transformation Timeline Clicks HIMSS EMR Adoption Model: Stage 6 Recognition Major Inpatient Electronic Medical Record Milestones Complete Ambulatory Rollout of Electronic Medical Record to Employed & Private Faculty Complete Orthopedic Building Opening Outpatient Cancer Center Opening New Hospital Tower Opening Additional Major Renovations Complete Bricks 24

25 Transformation of Facilities New Hospital: Expected January 2012 Acute & Critical Care Floors Women s Services & NICU Interventional Platform and Imaging Floors Center for Advanced Emergency Response Embracing Advancements in Care Model Delivery 25

26 Debt Profile Obligated Group $60, Peak Debt Service = $55,124 $55,000 $50,000 $45,000 Total Debt Service (Dollars in Thousands) $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 Leases 2009C/D 2009A/B 2008A 2006B 1998A 1989A 1985 $10,000 $5,000 $0 Fiscal Year 26

27 Interest Rate Swaps Obligated Group Interest Rate Swap Agreements Pay 3.945% / Receive 68% of 1-Month Libor Estimated Obligated Group Hedged Notional Mark-to Termination Member Item Amount Market (12) Value (13) Amounts in $000's RUMC 2008A Bonds $ 50,000 $ (6,984) $ (7,474) RUMC Unhedged 17,050 (2,382) (2,549) Total RUMC $ 67,050 $ (9,366) $ (10,023) RCMC Unhedged $ 29,700 $ (5,139) $ (5,707) Total Outstanding Swaps $ 96,750 $ (14,505) $ (15,730) Swap agreements are entered into at the Obligated Group level and expire 11/1/2035. The Obligated Group holds $48,375 in notional with Citigroup and $48,375 in notional with Morgan Stanley as the swap counterparties. 27

28 Capital Structure Evolution and Beyond Issued $200M variable rate with fixed-rate swaps (1/2 ARS and ½ VRDBs) Amended and Restated MTI Received standalone rating of A-; first since early 1990 s Approved 50%-50% fixed/variable rate mix Converted ARS to fixed rate Terminated $100M swaps (loss) Secured lines of credit and MLA Issued fixed rate new money De-risked unrestricted investment portfolio Primarily fixed rate debt Still dealing with unhedged swap (set trigger) Reporting liquidity via Moody s template Refinanced bonds with bank private placement Set capital structure based on overall risk at RUMC 28

29 New Structures mean different concerns Tax-Exempt Private Placement 1. Market Risks Market risk? Put risk? Refinancing risk? Tax/capital charges? 2. Material Adverse Change (Do NOT have your lawyers negotiate business terms!) Objective test, if possible Stress test the condition (back-test and what would have to happen for a breach) 3. Rating Agency & Bondholder assessment Share documents with rating agencies What are bondholders expectations? Type of disclosure in MD&A 29

30 Measuring DCOH to Cover Debt % Unrestricted Endowment % Short term Fixed Income % Cash and MMF Number of Days In Each Category % Illiquids % Equities % Corporate Debt % ABS, MBS % Government Assessment? Cost of debt versus investment yield? Manager exposure on investment managers and credit providers? Concentration? Average quality? Lock Ups? Commingled or separately managed 30

31 Proactive Debt Management Initiatives 1. Investor Relations Not only rating agencies Talk to the bondholders Quarterly or fiscal year investor call Annual bank meetings with access to non-finance management 2. Superior Disclosure to Investor Community Best practice quarterly and fiscal year (approved by Audit Committee) Post on EMMA and website Ask for feedback 3. Superior Disclosure to Board Governance Standard reporting package on financial metrics (including quantitative benefits if higher rating) Linkage with DCOH Spread between investments and risk-adjusted cost of debt Swap MTM, collateral posting Annual Board approval of debt, lease and derivative policies 4. Contingency Planning Back stop lines of credit Master Lease Agreements Call on cash 5. What s left? Full Enterprise Risk Assessment 31

32 Rush University Medical Center Obligated Group Investor Relations Plan FY2012 Q1 Q2 Q3 Q4 Fitch review (outlook upgraded to Positive) GE Master Lease Agreement increased to $75M Finance Committee approval of Debt, Derivative, Capital Lease policies Assess refunding opportunities for Series 1998A S&P review (outlook upgraded to Positive) Review of A1/A+ metrics with Finance Committee Peer analysis completed Series 1998A refinancing approved (12/16 closing) Dec. 1 st Investor Tour Renewal of $50M Northern Trust Letter of Credit and $100M JP Morgan line of credit Moody s review Renewal of $50M Bank of Montreal line of credit AHA/Citigroup/ HFMA Annual Bondholder Conference 32