This summer’s financial market volatility and the continuing pressure on government spending have made it more cumbersome for healthcare companies to secure capital.
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However, after years of navigating the waters of the economic downturn, healthcare companies are eager to execute plans to invest, grow and move forward. Securing capital, even in tough market conditions, is critical to fueling these business objectives.
In today’s financial environment, where capital is plentiful, but some investors are leery, healthcare companies must seek financing proposals that offer increased certainty of execution while maintaining flexibility.
Market Shifts
For companies seeking financings of $10 million to $20 million, a single lender is generally sufficient; however, for larger and more strategic financing needs, companies usually turn to syndicated loan facilities.
In the current financial markets, these syndications can be challenging because most investors are evaluating their exposure to non-investment grade companies. In addition, because of the uncertain political environment surrounding future U.S. government healthcare expenditures, some non-healthcare-focused investors tend to pass on healthcare financings that have direct or indirect healthcare reimbursement risk.
The typical strategy for healthcare companies in this environment is to avoid a broad syndication and focus on getting the deal done with fewer investors, typically banks, which tend to be more conservative than institutional investors with respect to structure and terms. Also, as a result of consolidation and fallout in the banking industry, this approach may limit the total financing available, and requires using an experienced and well-recognized lead arranger.
The Unitranche Option
For larger and longer-term borrowing needs such as recapitalizations and acquisitions, one popular option in this environment is a unitranche loan, which bundles several debt tranches into one set of closing documents and a single lender. This greatly simplifies the closing process and eliminates the execution risks of a broad syndication while maintaining flexibility.
Here are two examples of how a unitranche solution can work for healthcare companies:
- A fast-growing service provider has a time-sensitive option to acquire one of its largest competitors. Accelerated due diligence and certainty of deal terms are key to secure the asset. A unitranche facility provides a $40MM revolver and a $250MM term loan with one set of documents, one investor and no execution risk in an accelerated timeline.
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A private equity firm is bidding for a radiology services company. Uncertainties around successful integration with other portfolio companies, projected synergies and exposure to state and federal budget cuts creates a difficult “story” for a broad syndication to investors. The private equity firm uses a unitranche option structured as an $80 million senior secured term loan with a separate $10 million revolving credit facility and a $55 million mezzanine facility, all with the same lender.
The new era
In today’s increasingly complex market, investor willingness to support some healthcare transactions has changed, however financing options are still available. It is critical for healthcare borrowers to work with lenders that appreciate the unique needs of the middle market and the healthcare industry, and are able to lend in both stable and volatile market conditions.
Bob McCarrick is senior managing director and leader of GE Capital, Healthcare Financial Services corporate finance lending.