Why Timing is Key: St. Mark's Medical Center's Debt Refinancing Success

In the years since the economic collapse of 2008, interest rates within the bond market have been at historic lows. For community hospitals, refinancing debt at opportune times could be the difference to having a positive year.

Dennis Boyd, CFO of St. Mark's Medical Center, a 65-bed hospital in La Grange, Texas, has witnessed this firsthand.

He joined the hospital, which is operated by Community Hospital Corp., in January 2010. About six years prior, the organization funded the construction of a replacement facility. Through the Department of Housing and Urban Development and Federal Housing Administration's Section 242 Hospital Mortgage Insurance Program, St. Mark's was able to cover the project through $26 million in tax-exempt bonds.

By January 2011, Mr. Boyd and others looked at the balance of their debt from that project: $21 million remaining with a 4.5 percent interest rate. Mr. Boyd wanted to see if the hospital could take advantage of the low interest rates at the time and eventually connected with Scott Blount, CFA, a vice president at Lancaster Pollard, an independent investment banking firm.

Mr. Blount says they discussed a new loan modification under the FHA's 242 program.  "With a loan modification, all you're doing, if you have a mortgage on a house for example, is you take that note and strike through the current rate and put in a new rate," Mr. Blount says. "You have to change the amortization schedule, but it's a way to get a lower [interest] rate without having to incur high transaction costs."

St. Mark's was set to lock in a refinanced interest rate of 3 percent, a pretty significant drop from the 4.5 percent on its principal, but the new bonds could not be redeemed until Oct. 1, 2013, per the optional redemption terms of the existing bond documents. Mr. Boyd and other top leaders at St. Mark's placed a high priority on reducing interest rate risk, so they partnered with Lancaster Pollard to get the job done.

"A lot of these deals are dictated by interest rates, both by what you currently have and what you can get in the market," Mr. Boyd says. "Three percent was pretty low…and interest rates have already gone up."

The hospital went through an advanced refunding by defeasing the bonds. Essentially, St. Mark's set aside cash to offset the previous debt before it embarked on its new tax-exempt bond structure. The results? The principal balance was immediately reduced to $19.5 million from $21 million, and the 3 percent interest rate was locked for the life of the bonds. Mr. Blount says this saved St. Mark's $250,000 per year.

Mr. Boyd says being the CFO of a small community hospital can be challenging, but maneuvers like the loan modification can help relieve some of the financial stresses. "You're talking about rural hospitals," Mr. Boyd says. "You're like the walking wounded all the time, and it doesn't take a lot to take you down."

CFOs of community hospitals with growing debt burdens should take the time to evaluate the bond and interest rate markets, Mr. Blount says. Improving debt metrics helps the hospital's bottom line, credit rating reviews and overall financial stability. "If you have debt, CFOs are responsible for it," Mr. Blount says. "Periodically review debt based on the current capital market environment, and determine whether it's feasible to lower the debt service by refinancing.

"Every six months, [hospital CFOs] should look at the debt to see what options they may have and if it makes sense to do some sort of refinance to lower debt service," Mr. Blount adds.

More Articles on Hospital Finance:
FHA Sec. 242/223(f) Revisited: Is it Back at Just the Right Time?
Congress to Retain Hospital Refinancing Program
Smart Moves: How Hospitals Manage Risk When Borrowing

Copyright © 2024 Becker's Healthcare. All Rights Reserved. Privacy Policy. Cookie Policy. Linking and Reprinting Policy.


Featured Whitepapers

Featured Webinars