Hospital CFOs considering post-merger synergies should be sure to evaluate how they could potentially improve the debt structure of the combined organization, according to a report from investment advisory group Lancaster Pollard.
Here are four things to know about identifying debt synergies, or cash savings opportunities from refinancing, consolidating or restructuring debt after a transaction, according to the report's authors — Ken Gould, a managing director and member of the executive committee of Lancaster Pollard, and Brian Cafarella, an assistant vice president with the advisory group.
1. The first step to finding debt synergies is gaining an understanding of the debt structure and financial profile of the combined organization. "Since the devil is in the details, a thorough review and understanding of the existing debt structures and corresponding agreements for the combined system, coupled with an assessment of the combined system's proforma financial profile, is paramount to understanding if potential debt synergies exist," Mr. Gould and Mr. Cafarella write.
2. In order to assess the combined system's financial profile, hospital leaders must examine the system's "as-is" operations, based on the actual combined last 12 months of operating earnings before interest, proforma operations (including projected operating synergies from the transaction) and EBIDA of the two organizations involved in the merger. After mapping as-is operations, leaders need to evaluate the combined financial position of the system, according to the report.
"Breaking down the balance sheet into a consolidating schedule by entity as of the effective date of the merger is key to understanding which entities within the system are holding the majority of the liquid assets (unrestricted cash and investments), which entities are obligated under the existing debt obligations and if there are any restricted cash accounts associated with the existing debt," Mr. Gould and Mr. Cafarella write. "The EBIDA and balance sheet analysis can then be used to calculate the financial ratios, which are the basis for the financial profile of the system."
3. The key financial ratios include net debt to EBIDA, days cash on hand, debt service coverage, debt to capitalization and cash, and investments to debt. Hospital leaders should compare these ratios on an as-is and proforma basis to rating agency medians, according to the report.
4. After gaining an understanding of the combined entity's financial profile and existing debt structure, hospital leaders can identify savings opportunities. Some potential opportunities include reducing overall debt service, restructuring the obligated group, renegotiating covenants and releasing restricted assets.
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