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Financing Options

Karen Minich-Pourshadi, for HealthLeaders Media, June 10, 2010
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There are a variety of alternatives available to hospitals.

With $20 million in need of refinancing—including $13 million in variable rate demand bonds supported by a letter of credit—CFO Chris Lauer at McCullough-Hyde Hospital in Oxford, OH, knew it was time to look into nontraditional forms of financing.

The letter of credit was supported by a bank that didn't fare well during the 2008 and 2009 economic dip, and the hospital found itself in challenging circumstances with credit rating agencies downgrading the bank. In turn, McCullough-Hyde's variable rates started increasing and "our cost of borrowing was skyrocketing because of the bank's predicament. We needed to get out from under," he says.

The 45-staffed-bed hospital also needed a means by which to fund its IT project—a nearly $1.8 million replacement of the clinical and financial system—as well as to purchase some imaging technology. Still, the motivating force was to find a stable lender that could put an end to the variable rate increases. Though the hospital intended to do all of its projects with one bank, it found the local banks reluctant to take on the type of debt risk it needed. Eventually, McCullough-Hyde was able to secure a bank-qualified tax-exempt direct placed loan and replaced all $20 million and added another $3 million for another capital project.

McCullough-Hyde Hospital's story is like that of many hospitals caught in the variable-rate bond net. The recession dampened the markets and, for the most part, left hospitals with a lot of unanticipated debt. Though many experts believe that financing options and credit markets are on a slow upswing, if they don't fully recover by the end of 2010—and hospitals still haven't refinanced or funded their capital projects—then some experts say they'll miss out on a golden opportunity to grow.

For the past couple of years many healthcare providers have put capital projects on hold. But to stay competitive, finance leaders are looking for options and readying to proceed—which means finding the right funding options. Aside from traditional bank financing, such as bank letters of credit or unenhanced bonds, there are temporary financing options that can offer good opportunities, especially for small to mid-sized hospitals.

Most finance leaders will recognize the options, but the scope some of these options has changed due to various legislation. According to Tanya Hahn, senior vice president for the Columbus, OH-based Lancaster Pollard, an integrated investment banking, mortgage banking, and investment advisory services company, there are four nontraditional funding options to consider:

1. Federal Home Loan Bank. To replace larger regional or national banks that aren't lending or providing credit enhancement, facilities can blend local bank financing with FHLB credit support to enhance the debt and reduce the interest rate. In June 2008 Congress opened up this opportunity to non-housing borrowers; however, it expires December 31, 2010.

2. FHLB Letter of Credit. This option is ideal for small- to mid-sized capital projects. Keep in mind that it may be limited by a local bank's capacity to lend. Smaller banks may not be willing to assume too much exposure to one borrower, so loans of over $15 million are generally difficult for one bank to handle, Hahn explains. For larger capital projects, hospitals should look to use multiple local banks.

3. Tax-Exempt Bank-Qualified Bonds. In 2009, the American Recovery and Reinvestment Act increased the amount of bank-qualified bond that can be issued to $30 million from $10 million in bonds, but after December this limit will go back to $10 million. When these bonds are bank-qualified, banks can deduct 80% of the purchase and carrying costs and pass the savings on to borrowers through reduced interest rates.

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