"Following the capital markets' disruption in the fall of 2008, we determined we could not move forward with construction until we had confidence that we could access public debt markets as part of our financing plans," says Magenheimer. "In order to mitigate the financial risk of the project, we broke it down into three distinct phases and contracted separately for each phase. We had set aside $200 million in a special portfolio as a capital contribution toward the project. When the market meltdown hit, the portfolio retained its value."
To finance phase one of the project, a $225 million patient tower, Inova borrowed $190 million in the public debt markets. It's a financial approach Magenheimer says serves the organization well. "Generally, the public markets still tend to provide the best pricing compared to private financing. We have one bond issued as a private placement with TD Bank—and it was competitively bid—but in most instances our best pricing is in the public markets," he says.
In August, Inova completed a $400 million offering in the capital markets. Magenheimer says $300 million of that financing will go toward phase two of the south patient tower and a portion of phase three—a renovation of the existing campus slated for 2015.
"We are confident that Inova will have the necessary capital to complete all three phrases of the project. There's always a balance needed between borrowing at competitive rates and retaining some internal liquidity," he says. "One should first look at internally generated funds for project financing. However, we think the public markets in general will offer the most competitive cost of capital, provided an organization has to have the financial performance to access those markets," Magenheimer notes.
Though Shapiro and Magenheimer agree that commercial lenders tend to be better for short-term capital rather than long-term capital, such institutions are, nevertheless, viable lenders. Banks generally lend by directly purchasing tax-exempt debt with fixed or variable interest rates. The American Recovery and Reinvestment Act of 2009 widened the definition of bank-qualified debt, which encouraged approximately $70 billion of direct tax-exempt loans in 2009 and 2010, according to The Bond Buyer.
Although the temporary debt provisions under the ARRA ended with 2010, banks have continued to actively lend to healthcare organizations. "We're seeing a lot more activity, but the conversations are different," says John Hesselmann, specialized industries executive for Bank of America's Global Commercial Banking.