Healthcare Lending Returns to Sanity . . . Maybe

HealthLeaders Media Staff, April 20, 2009

The mood was remarkably upbeat in the room considering it was a group of healthcare lenders and borrowers discussing current 2009 lending trends on tax day. But maybe it was the strawberry-swirled yogurt parfaits at each place setting.

Is capital really flowing again? It is, bankers assured the audience of local healthcare execs. The recent Nashville Health Care Council meeting included a panel of healthcare lenders with both local and national healthcare practices. It was rounded out with David Anderson, senior vice president of finance and treasurer of HCA, Inc. Anderson backed the group's sentiments in announcing that the mega-hospital company had closed that morning on a $1.5 billion high-yield bond issue, the largest deal of its kind in 2009.

While healthcare borrowers are logically skeptical about their ability to access capital, panelist Kirk Porter, senior vice president of healthcare strategies with Bank of America, cut to the meat as he eyed the audience, which included a cross section of Nashville's most influential leaders. "As I look through the room here, we have a little over a billion dollars of capital committed to companies just in this room," he said.

To sum up the hour-long meeting, banks are bullish on healthcare, deals are getting done, and healthcare is a true growth engine for banks.

Sensing there might be some skeptics in the room, Porter said regardless of what we may read, Bank of America has grown its national healthcare business 18% in the last year with a $7.5 billion year-over-year increase in commitments. "We clearly have a desire to lend and the plan this year is for more of that."

Kevin Lavender, the head of Fifth Third Bank's national healthcare practice, which he started only three years ago, brought some gravity back to the conversation, saying there may be money to lend but the terms aren't going to be all that favorable in the short-term.

"I bet everyone is concerned about approaching your bank today to ask for an extension and increase," Lavender said. Anyone resetting a bank agreement today is going to look at increased pricing and increased fees. And even more uncertainty lies ahead.

"A flood of refinancing will come up in the next three years and nobody quite knows where the capital will come from to support that," said Porter.

That uncertainty was on Anderson's mind as he closed HCA's bond deal. "People can say you are trading off some very low interest rate for an obviously higher interest rate, but that is not the issue," he said. "The issue is to manage the refinancing risk out in 2012 and 2013."

While the market may be unpredictable and the regulatory clampdown that many anticipate is still a question mark, bankers only want predictable when it comes to parking their money right now. There's less to give and they're returning to practices your grandparents would approve of.

"We have an internal saying that today's $35 million commitment was last year's $100 million commitment," said Lavender. "The winners will be those with strong balance sheets and predictable cash flows, but also those who have the wallet where they can share with the bank," he added. "We are looking for a certain return that we haven't expressed over the last three or four years because we spent so much money chasing so few deals."

Across the board, the group also reiterated what we already know: solid management teams and strong business plans are key to accessing capital.

In the meantime, as bankers' doors are cautiously squeaking open, the cost of running a healthcare business goes up. According to the HealthLeaders Media annual survey of CFOs, 163 finance leaders at healthcare organizations say government laws and mandates, labor costs, and clinical technology are the biggest drivers of healthcare costs. Porter, with Bank of America, said there are positives on the horizon. "While a lot of the stimulus package and regulatory changes in some areas are neutral to negative, I think there is a perception they may be actually neutral to positive to the industry as a whole," he said, pointing to funding that is going to SCHIP expansion, Medicaid, and IT.

On a much more tangible level, the stimulus bill includes a provision for nonprofit hospitals looking to do capital expansion projects this year and next. They can now receive up to $30 million in bank-qualified tax-exempt bonds, up from the current limit of $10 million per calendar year for a municipality.

When asked whether banking today is a "brave new world" or a return to sanity, Lavender said this: "We reached a 'brave new world' but have headed back to sanity in terms of pricing."

While we hear a lot of throwaway phrases like "it's time to get back to basics," and "tighten up business plans and management teams," I can't help but be comforted by them. They tell us "okay, the bubble is over" and now it's back to what we know was right all along.

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