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New Bond Rules Greenlight Stalled Capital Projects

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Bank-qualified bonds triple over the next two years.

Finally, some good news for hospitals and it comes in the form of bank-qualified bonds. Nonprofit hospitals that have been holding off on large projects because of an inability to access capital can take advantage of a new program from the government that allows them to essentially triple the amount of bank-qualified bonds they may sell per year.

While the Tax Reform Act of 1986 has limited the sale of bank-qualified bonds to $10 million a year, that changed in February. That's when President Barack Obama signed into law the American Recovery and Reinvestment Act of 2009, which added a temporary provision allowing nonprofit hospitals and other 501(c)(3) organizations to now sell up to $30 million in tax-exempt, bank-qualified bonds in a single calendar year.

"Last fall the market was pretty much dead," says Arlan Dohrmann, managing director of the national healthcare finance group at investment banking firm Stern Brothers & Co in Chicago. "The high-yield market, which is for BBB and below, has been basically closed since September 2008 and so there has been effort to try to energize the market by offering different programs."

The new program is ideal for smaller community hospitals since they won't need FHA or credit enhancement to sell to banks, says Dorhmann. Large systems can also take advantage of the program by allocating up to $30 million per hospital, he adds. Financing for these deals can be done in as few as 60 days, compared to regular tax-exempt bond financing, which takes 90 days or more. Moreover, financing bonds under the new program requires no application fee, as compared to the FHA hospital loan guarantee program, says Dohrmann.

"Banks that buy these bonds generally buy them at rates substantially lower than conventional tax-exempt bond rates in the market, since they are so valuable," he says, noting that typical municipal bonds are not exempt from federal taxation.

In Fort Bragg, CA, Raymond Hino, CEO of Mendocino Coast District Hospital, is considering another bond program under the ARRA called Build America Bonds. The 25-bed critical access hospital is looking to do a nearly $15 million bond issuance this year to replace its diagnostic imaging center along with other improvements.

Under BAB, bond issuers can elect to have the federal government pay a federal tax credit equal to 35% of the interest on the bond each year through the life of the bond. "We have been very interested in any opportunities through the economic stimulus act to help offset the costs of construction," says Hino, adding that the hospital is anticipating a 6% interest rate on the issuance. "As a small facility, debt financing is a concern to us, and we became very excited about the prospect of having the federal government pay 35% of the interest costs through the life of the loan." Hino estimates the hospital could save $6 million through the bond program.

Hospitals will need to jump on both of these new programs this year or next. The legislation has a sunset of December 31, 2010, unless Congress decides to run it longer, says Dohrmann.

Michelle Ponte

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