4 Key Trends in Healthcare Financing for 2012

The healthcare industry — including hospitals, skilled nursing facilities, home health agencies, specialized pharmaceutical companies and every other niche — is in a tremendous period of change, and the financing needs surrounding those sectors have ballooned into unique situations and created new overarching trends.

Scott Becker, JD, CPA, partner at McGuireWoods, moderated a webinar on March 8 titled, "Healthcare Finance 2012: A Look at Trends, Terms and Providers," with several healthcare financial professionals, including Claudia Gourdon, senior vice president and national marketing manager of Healthcare Finance Group; Shane Passarelli, senior vice president of Healthcare Finance Group; Gary Samson, JD, partner at McGuireWoods; and Don Ensing, JD, partner at McGuireWoods.

Borrower backgrounds and loan trends
For HFG, hospitals — for-profit and non-profit acute-care facilities and rehab and long-term acute-care hospitals — are the largest sector both in terms of the number of financing deals and the dollar volume of transactions, Ms. Gourdon said. Laboratories, specialty pharmaceutical companies and other related companies follow closely behind in terms of the number of deals, although deal sizes tend to be larger, and HFG is also an active lender for SNFs, home health agencies and imaging. "These are all new borrowers, and my comments do not take into account refinancings, extensions and amendments," Ms. Gourdon added.

When it comes to existing borrowers, Mr. Passarelli said home health agencies and nursing homes have been fairly active, based on what he and HFG have seen over the past 12 to 18 months. Mr. Samson said he has seen a lot of activity by lenders on tax-exempt refundings. "Lenders and providers find it very beneficial to refund all or a portion of their tax-exempt bonds that were previously issued," Mr. Samson said. However, this trend only applies to investment-grade hospitals and will only last as long as this low interest rate environment continues.

Overall, Mr. Passarelli said the average portfolio healthcare company has roughly $125 million in revenues, and the average loan is about $15 million. He says HFG has a relatively normal distribution, in which the minimum loan is $5 million and the maximum hovers around $150 million. In certain situations, HFG tends to be flexible, offering everything from exit financing and restructuring to growth capital recapitalizations, leveraged buyouts and typical asset-based loans. Most healthcare facilities need to have a stable revenue flow to consider these bigger financing measures. "We're generally looking for a company that has a defensible base of revenue above $50 million," Mr. Passarelli said.

Mr. Ensing added the hospital and SNF consolidation movement has driven a lot of lending over the past six to 18 months, and he has seen many loans range between $40 million and $60 million.

Larger entities are the most active borrowers, and their loan sizes are increasing primarily due to demands for growth capital growth and particularly for acquisitions, Ms. Gourdon said. The same cannot be said for smaller healthcare groups, as they have been going through a "deleveraging period." "Demand for them has stayed the same or has actually gone down a little bit," she says.

When it comes to interest rates, Ms. Gourdon said the rate depends heavily on the hospital's or other healthcare entity's credit, size and other factors. HFG lends off LIBOR and sets a 1 to 2 percent floor. Depending on the situation, the interest rate over the LIBOR base would be between 3.5 and 5 percent. A company's EBITDA also matters when it comes to leveraging a loan. For example, Mr. Passarelli said if a healthcare institution has more than $100 million in revenue and $10 million in EBITDA, they may lend 3x+ EBITDA, but for smaller borrowers with less than $100 million in revenue and $10 million in EBITDA, multiples tend to be less than 3x. In general, the leverage multiple ranges between 2 and 3.5x.

Mix of lenders
Many healthcare entities are looking for financing, but where are they turning? Ms. Gourdon and Mr. Passarelli indicated that specialty healthcare lenders like HFG are thriving because they offer borrowers healthcare financing expertise that other, broader lenders may not be able to offer. Mr. Ensing agreed, saying specialty healthcare lenders are in full force in today's market, but banks have become extremely competitive in the past 18 months as well, particularly due to the low interest rate environment.

One major area that cannot be left out are the private equity firms. Mr. Passarelli says private equity firms are actively looking for sound investments in healthcare, and the major attribute for building a platform is a strong management team. For example, Cerberus Capital Management didn't just buy Steward Health Care in Boston for its assets — Mr. Passarelli said Cerberus saw potential with Ralph de la Torre, MD, the health system's CEO, and the entire executive staff.

Mr. Samson added that it certainly is a buyer's market, and in terms of competition, the rate of the loan is a possible area where lenders can be differentiated. However, a big component that cannot be overlooked is what a lender is willing to lend. "Each lender has their own formula of how they will calculate borrowing availability," Mr. Samson says. "Availability in some sense is more important than rate because rates are going to be exceedingly low."

Core financing risks
For lenders, identifying risks that may endanger a financing deal are somewhat difficult to address because they are not necessarily cut-and-dried. "We tend to look at every situation on a standalone basis," Ms. Gourdon said. "We are careful not to generalize, although we are very aware of what's going on in the regulatory environment."

However, there are some factors that could give a lender pause, such as the stability of revenue and EBITDA. A hospital or other healthcare group must also show efforts are being made to improve its financials and have a "defensible market position." Mr. Passarelli added that third-party liabilities, potential RAC audits (such as a hospital having a high number of overnight observational stays) and Stark Law implications must be monitored.

Mr. Samson said he hasn't seen a lot of deals crumble, but there have been two areas of risk to watch, in addition to those previously mentioned: False Claims Act matters and Medicaid issues. False Claims Act risks can be mitigated if the lender has confidence in the borrower's quality of financial records, and Medicaid issues are evaluated on a state-by-state basis. For example, in California, the state is cutting Medi-Cal reimbursements by 10 percent, and it has caused some lenders, particularly banks, to withdraw financing commitments.

In order to sidestep any risks, Ms. Gourdon recommends hospitals, providers and other healthcare borrowers be ready and willing to talk about previous problems and issues upfront. "Telling your potential lender bad news early is always very important," Mr. Gourdon said. "Lenders hate surprises, and [revealing issues] goes a long way to making the road a little smoother."

Do lenders prefer specific healthcare sectors?
Although there are many healthcare sectors — hospitals, home health agencies, SNFs and more — vying for financing, healthcare lenders are more focused on looking at the entire field and finding opportunistic borrowers. "It's really more credit-focused than sector-focused," Mr. Samson said. "Healthcare lenders are picking the credits that make the most sense and don't restrict themselves to hospitals, specialty care or pharmaceutical."

Just like making a sales pitch to an entrepreneur, hospitals and other healthcare entities can gain favor with lenders by providing perspective to their backgrounds. "The most important thing about potential borrowers is the story they can tell," Mr. Samson said. "What makes them unique from competition? Why are they in the business? Is the hospital needed in the region? The individual story is really what drives a lender to want to make a loan to that particular company and not necessarily the sector they happen to be in."

View the webinar by clicking here (wmv). We suggest you download the video to your computer before viewing to ensure better quality. If you have problems viewing the video, which is in Windows Media Video format, you can use a program like VLC media player, free for download here.

Note: View archived webinars by clicking here.

More Articles on Healthcare Finance:

Mission Possible: Finding Capital for Standalone Hospitals

4 Main Drivers for Middle-Market Hospital Financing

The Uninsured and Net Returns: Q&A With DeKalb Medical CFO Diane Harden

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