Continuing uncertainty and volatility in the capital markets has left many healthcare providers with maturing bonds and fewer options. A flight to quality for the major lenders in the sector has left a void for those hospitals and systems with a BBB or lower grade. While there remains an abundance of access to capital for those providers above BBB+, they too have their work cut out for them in the current market where commercial rates have been lower than tax-exempt and restructuring bonds has started to require an architect in the equation. So, where can you turn? Private placements may hold the key and if you’re not planning far in advance of your bond maturity dates, you’re making a mistake.
A sentiment shared by many, a CFO of a large Southeast hospital system told me, “I’ll be glad when the markets get back on track….What worries me now though is that they may already be on track; it’s just a different track.”
Historically, troubled waters for healthcare capital have been on one side or the other; with the providers and reimbursement or legislation uncertainty, or with the banks and uncertainty in the capital markets. Today we have increasing pressure and concerns from both ends. With the news of Bank of America’s potential 40,000 layoffs, we’re reminded the financial crisis is far from over. But with an overabundance of competing bank branches in many cities, 3 or 4 to a corner, the BAC cuts could provide some relief for the sector. Banks are looking for ways to run a meaner-leaner organization; trim expenses on a large scale, improve yields and fee income across the board and continue to meet the needs of their clients. The flight to quality was one way to reduce risk for the banks, but the resulting yield compression means billions of dollars of loans are earning far below target.
Those lenders starting to migrate from the flight to quality are finding very well-performing credits in Healthcare’s middle market. For healthcare providers below investment grade, or not graded by one of the main rating agencies, private placements may be your best bet for restructuring some of your maturing bonds.
Unlike the public bond offerings, private placements are loans typically with a single investor, in most cases a bank. The current rates are favorable and the cost of bond underwriting is removed from the equation, saving the healthcare provider 1% of the loan amount right from the start. In contrast to public bonds, a private offering is a medium-term debt instrument with balloons ranging from 5-10 years. With amortizations exceeding the balloon maturity, cash flow is protected and using fixed-rate structures removes the volatility the recent VRDO’s brought to the market.
If your hospital or system is a year or two, or less from significant maturities, now is the time to reach out to your lenders, start making new lending relationships if necessary and question the health and outlook of your bank as well as their appetite for private placements. Refinancing G.O. bonds, replacing VRDO’s, eliminating the risk of your floating rate instruments and bringing stability back to your capital planning could be critical first steps in helping your hospital or system navigate these troubled waters. In fact, through a private placement you may save thousands and immediately improve cash flow. Today more than ever, the more relationships you have in lending will help ensure you have viable options for your continuing success and survival.