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Finding Capital

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Hospitals are clutching cash reserves and pooh-poohing the debt markets, but when they decide to spend again, it may be a whole new world.

The debt markets aren't exactly dead like they were last fall, but so what? Many hospitals just aren't interested in taking on more debt, at least for now. And that goes for the stronger-rated credit organizations as well, say investment bankers and healthcare executives alike.

"What I am hearing is there is a very conscious effort to limit capital spending," says Dionne Viator, executive vice president and CFO of Baton Rouge (LA) General Medical Center. Fresh from an investors conference in New York, she says organizations are restricting spending to either projects that are break/fix, or they are creating this "super-threshold ROI" that a project has to cross to be slated for capital spending priority.

"It's across the board, with even your A-rated, a-lot-of-cash-in-the-bank organizations doing this," she says, somewhat surprised. So even though the better credits can access or will begin shortly to access capital, they have held back, waiting to see what is coming out of Washington, says Viator. "I think that is what you are seeing drive some of this limitation on capital spending, too."

With the easy cash gone and healthcare reform hovering close by, it makes sense that organizations are putting themselves in the no-spend zone in increasing numbers. This tactic, however, can't last forever because it is only a contingency plan, really. When everyone comes up for air and projects need to be financed, will they go back to the capital markets for debt financing? Or are we looking at a whole new world in terms of how projects are financed over the next few years?

"We think that traditional sources of financing will be less available and less reliable, particularly as you look at the weaker, lower-investment-grade credits that could have accessed the market at reasonably attractive levels a year or a year and a half ago," says Jim Cain, managing director and CEO of New York investment banking firm Cain Brothers. "Many of those are not going to be able to do it going forward."

At the same time, Kirk Porter, senior vice president of healthcare strategies with Bank of America, says another issue that could impact hospitals trying to access cash in the debt market is that a flood of refinancings is coming due across all sectors, including hospitals. "During the peak of the syndicated loan market of 2006 and into 2007, most syndicated loans had a maturity of five to seven years," he says. "Those loans will need to be refinanced from 2010 through 2013," he adds. According to Thomson Reuters estimates, $200 billion in debt from institutional loans and high-yield bonds is expected to mature through 2010, with another $170 billion due in 2011.

The net result is that capital may become more difficult and expensive to access, says Porter. Given all of these pain points in the capital markets, some industry observers believe hospitals will be making substantial changes in how they access capital.

Hospital boards seeking capital
The hospital board room is one such area that is starting to see a shake up. One change hospitals can expect to see is boards looking for alternatives to the debt markets. "Hospital boards are getting really tired of coming to their quarterly or monthly meetings and seeing red ink and problems with physicians and achieving a market position," says Cain. As such, he adds, "they are becoming more receptive to alternatives that put the hospitals on solid footing." While there has been a loosening up of the credit markets, he says, "going back to the debt market and adding more debt to the balance sheet is not always a good long-term strategy."

Besides, he says, any deals of size would be problematic for organizations with lower investment grade ratings.

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