More Excess Cash, Days Cash on Hand?

Many hospitals are showing record margins through YE2010, with historically high “excess cash.”  Investment Bankers agree, now’s the time to make a positive change for the future of your hospital or system by preserving that cash, improving your days-cash-on-hand and increasing your chances of a positive move in your investment grade.

Coming off two years of spending freezes and delayed, critical equipment and systems upgrades, means you have some spending to do.  Burning up that excess cash and not considering a revised approach to your overall capital strategy could be a costly mistake. 

 The bond market remains largely off track especially for non-rated or non-investment grade hospitals.  However, even for the highest rated hospitals and systems, longer term rates for tax exempt bonds are actually higher than commercial bond rates right now. Re-investing in your operation, expanding services and upgrading technology can all be done with mid-term financing; 3-5 year terms, commercial or tax-exempt rates around 5% or 3.00% respectively, or lower.  You’ll reduce your need for longer-term financing in time for your next bond issue and your days-cash-on-hand will remain steady at a new high, giving analysts the confidence they need regarding your ability to navigate through these difficult times.  

 How often does the market give you a landmark opportunity to make a significant, positive impact on your long-term capital strategy?  Not very, but it just did!  Burning up that cash and reducing your days-cash-on-hand will mean you’ll be forced to borrow more when the rates have gone back up.  Locking in historically low rates now, reducing your demand for longer-term debt while the bond market remains unstable and increasing your chances of an investment grade improvement, could save your hospital or system millions.   

 Be sure your advisors are comparing all the options at your disposal.  It’s a great time to build new relationships in the banking market, to test the skills of your financial advisor and start looking outside the “box” for new ideas.  Variable Rate Demand Notes and Bonds have caused a good bit of heartburn.  Insurance enhanced bonds may be a thing of the past.  Taking steps now to re-examine your overall capital strategy, leveraging mid-term rates for purchases that fit a clinical life cycle of 3-5 years, improving your days cash on hand by holding onto your excess cash, created in large part by all the cuts and evasive measures you’ve taken the past 2 years, may significantly improve the future of your hospital or system for years to come.

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