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Debt Deliverance

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As the Federal Reserve Bank raised lending rates 17 straight times over two years before pausing in August, stock market investors fretted. But not hospital chief financial officers. The hospital business in general is performing better than it has in years, and despite the rate hikes, borrowing to fund municipal bond offerings is still relatively cheap—and oversubscribed by underwriters.

As a result, many hospitals are undertaking massive renovation and total replacement projects—and financing them mostly through debt. The clamor to underwrite that debt means it’s highly attractive for hospitals to access the bond market to fund improvements rather than dipping into cash reserves.

“The fact that there’s limited underwriting risk to getting the debt placed makes for a more favorable rate structure,” says Al Mansfield, a senior executive at Nashville, Tenn.-based FTI Cambio Health Solutions, who recently served as interim CFO at Ascension Health’s 129-staffed bed St. Joseph Hospital in Augusta, Ga.

In fact, many hospitals and health systems are seeing perhaps the most attractive terms in at least five years, says Jim Vaughan, managing director at Cain Brothers, a New York-based investment banking firm. But the decision about whether to borrow to build comes down to the individual institution’s own analysis. “Every CFO will consider his ratios vs. the credit category he’s in,” Vaughan says. “Will they take a possible downgrade for something that will ultimately put them in a better position in the future?”

Given the recent favorable interest rates and oversubscription levels in the bond market, the answer often seems to be yes.

Mansfield says St. Joseph could have borrowed to fund several capital projects, but it chose to convert some balance sheet items into cash to fund its projects. Meanwhile, its competitor, 505-staffed-bed University Health System, recently sold bonds to build a new $50 million cardiovascular center, among other improvements. “Hospitals are doing pretty well, and they have been for a long time,” he says. “Consequently, they have more internally generated capital to utilize.”

Perhaps that’s why the hospital debt demand is so high. Much of the decision about funding a project rests on days cash on hand, says Mansfield, who adds that most CFOs seriously consider debt to be the best option for increasingly large construction projects. “I’m seeing more total replacements and massive renovations, which, because of the size and the extremely long duration of the projects, speaks to the need for long-term debt financing.”

—Philip Betbeze