Dealing With the Credit Conundrum

Philip Betbeze, for HealthLeaders Media, October 27, 2008

It's no secret that the credit markets have frozen in the past several weeks, causing huge problems throughout our financial markets. But the implications of what that means for your organization are even more complicated and can be downright frightening. So what do you do about it?

Simply put, if you're the chief financial officer at a hospital and you don't have an immediate cash or debt need, you may not be aware that the market for your debt is essentially closed. That by itself is an eye-opening revelation. You can't do a deal today. So what do you do about it? Well hopefully we at HealthLeaders Media can help.

"What's taken place over the last six weeks is unprecedented," says Peter Bruton, managing director and a senior investment banker with RBC Capital Markets. "The auction rate problem (you remember that crisis last spring, right?) pales in comparison."

That means hospitals are delaying or canceling important projects—some of which have been in the works for years—that have associated salaries and timetables for completion, and on which the success or failure of the entire strategic plan of the organization may hinge.

Why can't you access capital right now? After all, your organization has always been a good credit risk. First, there's no more bond insurance to speak of, and if you can get it, no one really trusts that it will pay off anyway if you default. Second, your access to letters of credit has substantially diminished. Banks just aren't lending much—they're too scared that they'll need that cash, so they're hoarding. So there's no appetite from institutional investors for your debt, no matter how safe a risk you really are. Third, your investment accounts have probably taken big hits, as have just about everyone else's. So funding any projects with cash might have once been an option, but that option seems to be getting less attractive by the day.

"One CFO called me the other day and said his investment strategy has got to be looked at, as well, because besides the obvious problems with the debt side, the asset side has been declining," says Arlan Dohrmann, a managing director at Stern Brothers, a boutique investment bank.

Just last week at our annual Top Leadership Teams conference, I was chatting with the CEO of a large AA-rated hospital who has several large projects in the works. He admits that the projects will either have to be delayed or the system will have to pay for them with cash, "which we can do, but which we don't want to do."

When you get unprecedented dislocations of this magnitude, hospitals, along with every other business, have to re-evaluate their financing options. I'm hosting an important Webcast Nov. 3, and I think it may shed some light on possible solutions you can try to alleviate the impact of the credit crunch on your hospital or system. My guests and I will help you to:

Identify what financing alternatives are available

Illustrate the near-term expectations for healthcare borrowers

Recognize what solutions can the financial markets provide in today's crisis

Clarify what steps hospitals/systems should take to re-evaluate their capital structure and plans—both short term and long term in light of the new limitations

Explain how the financial crisis impacts hospitals/systems in their ability to access both internal and external capital

Peter and Arlan will be joining me to speak on these matters, and Paul Keckley, executive director of the Deloitte Center for Healthcare Solutions, will also add his perspective.

They've identified some creative solutions to this mess, and while I'm not promising any easy answers, these speakers will do everything they can to help you sort through the morass and perhaps offer some solutions that you could try to get funding.

And yes, we take credit.

Philip Betbeze is finance editor with HealthLeaders magazine. He can be reached at

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