Moody’s continuing negative outlook for the entire sector of healthcare certainly plays a part in the “flight to quality.” We’ve discussed previously that the largest lenders in healthcare have moved up stream, providing ample capital and solutions to the highest investment grade providers. This is certainly beneficial to these larger, or financially strongest hospitals and systems because it has caused a rate compression of unprecedented levels. That means the spread over the lenders cost of funds is deeply reduced from normal, target spreads. This results in lower profit for the lenders for these loans, but the trade off is the greater security of the largest and most stable credits in the sector. What about the rest of the sector and what are some creative approaches to solve current capital needs?
The rest of the sector is largely left underserved. The community hospitals or smaller systems either un-rated or non-investment grade are turning largely to local or regional lenders who in some cases are continuing to have liquidation problems of their own. Large physician practices, outpatient centers and doctors are also turning to local sources or smaller leasing companies for options that are not fully reflective of the historically low rates we currently have. Some national lenders are starting to shift downstream to provide solutions for the well-performing credits below investment grade. Last month I wrote about private placements for bond and VRDO take-outs, but there are other creative options to consider, depending on your current needs and some of them don’t directly involve a lender.
Monetizing your real estate: The sale of your real estate to a REIT or similar entity can have a positive effect on your overall capital structure from several angles. Cash at closing and the continued use of the property at a fraction of your normal monthly cost is certainly high on the list. But for hospitals, compliance may be a stronger reason to consider this option and open other options related to your physician alignment goals and relationships.
Joint Ventures: This should be high on the list for physicians involved in outpatient center ownership and for hospitals looking to effectively retain top physician talent, improve quality of care and the profitability of many services that can be better performed in an outpatient setting. For Outpatient Center Development Firms, JV’s with hospitals can add substantial strength to the enterprise and patient base, making it easier to grow and attract new physicians to continually increase the number of procedures and improve economies of scale.
Equipment Lease/Loan consolidation: Rolling multiple leases or loans into a single sale-leaseback or re-finance can save you money and time by improving the efficiency of your related payables and consolidating to a lower rate, taking advantage of today’s historic lows.
“Capaq” line of credit: Capital acquisition lines of credit are great tools for hospitals, large practices and centers with large capital equipment needs. Rather than wasting time financing individual purchases with multiple vendor captives or multiple lenders, all at different rates, you can negotiate a single line, lock in a rate or spread and save money while improving the efficiencies of your related materials management and accounts payable functions.
While the market continues to struggle, it’s critical to look to new ideas, new structures, solutions and funding partners to help solve your capital needs. There is a great deal of waste in healthcare and any steps we can take to eliminate waste and improve efficiencies will help you sustain and perhaps thrive through these turbulent times.