The Effect of Healthcare Reform on Access to Capital. Presenter: Gerald M. Swiacki, SVP & SE Regional Manager, Lancaster Pollard

Transcription

1 The Effect of Healthcare Reform on Access to Capital Presenter: Gerald M. Swiacki, SVP & SE Regional Manager, Lancaster Pollard

2 Agenda Reform s Impact on Access to Capital Capital Market Update Assessing Credit Profile Debt Options Case Studies Alternative Sources of Capital 2

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4 Reform or Not Market forces were already driving providers: Improve value Enhance customer satisfaction Reduce costs Ensure financial viability Manage care instead of treating episodes Quality Accountability 4

5 Nevertheless we have REFORM Inpatient Prospective Payment System Medicare DSH Payments Hospital Acquired Conditions Hospital Readmission Reductions Budget Sequester Health Insurance Exchanges ACOs Overall, tremendous uncertainty 5

6 Autos, Airlines, Food Service? 6

7 Leadership s Responsibility Facilitate the transition from volume to value Focus on costs and outcomes IT investments Identify & implement operational best practices Evaluate capital allocation Enhance Core Assets Shed Non-Core Assets Address Critical Infrastructure Issues/Upgrades 7

8 Capital Markets: General Update Continued global uncertainty U.S. equity markets performing relatively well Fed committed to low rates Fed Funds: unusual commitment Faster economic growth Lower unemployment Inflation QE3: bond purchases at $85B per month 8

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11 Capital Markets: Health Care Health Management Associates (HMA) Market cap over $3.6B Stock near 52-week high ($14.13) Subject to significant takeover talk ($18.50?) Community Health Systems (CHS) Market cap over $4.5B Stock near 52-week high ($49.92) Slight dip and complete recovery re: HMA 11

12 Which Analysis Is Correct? Positive Favorable pricing with public health exchanges Volume growth, especially for rural operators Elimination of doubtful accounts Negative Lower utilization Transition from fee for service Reimbursement down / Costs up 12

13 Rating Agencies S&P and Fitch Stable outlook Moody s Negative (5 th consecutive year) Comments Cost containment Low hanging fruit picked Remaining opportunities difficult to accomplish Looming reimbursement reductions Tepid economic growth Increased competition 13

14 Tax-Exempt Bond Volume Public offerings for healthcare providers has increased 2011: $26.7 B 2012: $32.9 B Why? Refinancings Reduce interest cost Convert variable to fixed Can no longer delay strategic initiatives 14

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16 Investor Appetite Net negative issuance of debt Scarcity of product Increased demand Driving overall rates down Seeking yield Credit spreads compressed Tight between all IG levels 16

17 Health Care Investment Grade 17

18 Health Care Yield Curves (6/12/13) 18

19 Credit Assessment: Art & Science Quantitatively: the ratios Liquidity Profitability Capital structure Qualitatively: the story Economy Local market demographics Competition Management & Board 19

20 Taking measure The Safety Net Days Cash on Hand Cash-to-Debt Success of Operations Operating Margin Cash Flow (EBIDA) Margin Prudence Debt-to-Capitalization Debt Service Coverage 20

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23 Debt Options 23

24 Summary of Debt Options P o te ntia l F ina nc ing O ptio ns Financing Source Public Is s uance Private Place me nt USD A CF FH A 242 Interest Rate Fixed Fixed / Variable Fixed / Variable Fixed C onstruction Financing Yes Yes NO Yes Amortization Up to 30 Years Years Up to 40 Years 25 Years Debt Service Reserve Fund M ost likely Varies by Bank Direct Loan only Yes C urrent Estimated Interest Rate 4.0% - 5.0% 3.0% - 4.5% 3.50% 3.25% Ability to Involve Local Banks Yes Yes Yes No Estimated Timing 150 days 120 days 210 days 240 days 24

25 Summary of Debt Market Bond insurance has all but disappeared Basel III regulations have reduced appetite for banks to provide LOCs for enhancement Momentum has shifted to direct purchases No need for rating Fixed or variable Commercial banks participating No public disclosure required 25

26 Unenhanced Fixed Rate Bonds Tax or revenue supported Interest rate based on credit profile Best execution with rated entities Minor coupon difference between rating levels Pros No enhancement fees Fully amortizing No reset risk Cons Prepayment limitations Locks in credit profile Debt service reserve fund 26

27 Direct Bank Placements Alternative to VRDB/LOC structure Bank Qualified can enhance appetite Utilize existing bank relationships Competitively bid for betters terms and pricing Pros Limited disclosure Flexible terms Draw-down construction funding can reduce costs Cons Must fit bank needs Limited fixed-rate options Difficult for projects greater than $40M Renewal/refinance risk 27

28 FHA 242 Mortgage Insurance Any type of project Any size hospital Requires a mortgage 90% LTV Pros AAA/AA interest rates Flexible terms TE/TX funding Permanent financing Non-recourse Cons Financial qualifications Lengthy closing process Davis-Bacon wages Reserve fund requirement 28

29 USDA Programs Community Facilities (population < 20,000) Direct & guaranteed loans No min/max loan amount Fixed or variable rates with term up to 40 years 90% Guaranteed Business & Industry (population < 50,000) Projects must create or save rural jobs $10M max ($25M in special circumstances) Fixed or variable rate with term up to 30 years Up to 90% guarantee 29

30 Case Study #1 184-bed hospital Threshold investment grade financial ratios $27M of bonds outstanding LOC-enhanced (expiration Dec. 2012) LOC priced below 1.0% Swap had a large mark-to-market liability 30

31 Case Study #1 (continued) Options Renew LOC FHA 242 Unenhanced Tax-Exempt bonds Direct Bank Placement Decision: Direct Bank Placement Variable 65% of LIBOR % 5-year term No termination of swap 31

32 Case Study #2 621-bed, 3 campus system Investment-grade rating on existing debt Recent capital projects funded with cash Less debt Reduced liquidity Rating dropped from A2 to A3 Strategic plan called for significant cap ex throughout system 32

33 Case Study #2 (continued) Options FHA 242 Unenhanced Tax-Exempt bonds Direct Bank Placement Decision: Unenhanced Tax-Exempt bonds Originally, just new money Muni market improved, so refinanced as well A3 rating 15% in debt service savings (NPV = $8.8M) 33

34 Case Study #3 25-bed Critical Access Hospital 2008: decided to modernize 2010: rebuild on site Anchor downtown redevelopment plan Impressive liquidity $53M project Only acute care provider in county Needed to increase market share regionally 34

35 Case Study #3 (continued) Options FHA 242 USDA Community Facilities Decision: USDA CF HUD invited application for scaled down project USDA committed to $47M $37M direct (3.375% for 40 years) $10M guaranteed (25 year term) BANs issued to fund construction 35

36 Alternatives 36

37 Alternatives: They are available When? Fund non-acute care settings Fund assets that do not meet permitted use Short-term assets Why? Preserve capital for other purposes Realize value on balance sheet Avoid conflict-of-interest prohibitions Off Balance Sheet 37

38 Alternative Sources of Capital REIT Non-acute care real estate Prefer stabilized assets Sale/Leaseback Acquire at 100% of market Lease rates effectively 7.5% - 9.0% Lease Information technology Minimize up front cash 38

39 Another Alternative : Taxable Tax-exempt Historically, lower rates High costs of issuance Taxable Corporate market considerably larger Little difference in rates Hard to justify cost Avoids IRS use restrictions 39