Healthcare financing appears to be a big waiting game in early 2009.
Despite receiving $350 billion in TARP funds, banks continued to clutch their cash reserves tightly in mid-February. Everyone, it seems, is counting on someone else to make the first move.
The stalemate could – and most likely will – last through the end of the year, financial observers contend. The climate needs to warm up before the credit freeze can thaw, they say, and that will take time.
“Banks at any level – regional or money centers – still are faced with write-downs in their portfolios,” said Doug Korey, managing director of Shrewsbury, N.J.-based Contemporary Healthcare Capital. “Finance companies continue to have difficulties raising capital at reasonable rates, thus limiting their ability to lend. Even those that have been able to take advantage of the government bailout funds and change their status to a bank holding company are still struggling to regain their footing. Overall, the credit markets are extremely poor as it relates to lending and the healthcare market is not immune.”
Korey describes the probability of credit loosening in 2009 as “slim to none,” due to a chain reaction of negative events that are continuing unabated.
“First, consumers will not become more confident when job losses are in the hundreds of thousands per month and new layoffs are announced daily,” he said. “In that same vein, the housing crisis will continue as long as people lose their jobs. We are facing a horrendous year in terms of retailer bankruptcies. States are struggling with staggering deficits. California, for example, is issuing IOUs as payment to vendors. The residual effect of this action is that people receiving the IOUs now will constrict their spending further than before.”
Gary Bunton, director with the Chicago-based Huron Consulting Group, also sees “a very difficult slog, unprecedented in slowness of turnaround time” on the immediate horizon.
A 30-year veteran of the non-profit healthcare financing sector with Merrill Lynch and other big Wall Street firms, Bunton has spent the past three years helping hospitals re-engineer their operations in order to make them more attractive to lenders. He suggests hospitals take advantage of the slow credit period to make operational improvements so that they are well positioned once funds start flowing again.
“Hospitals have a reputation for being risky and I don’t know why because investors usually do pretty well,” Bunton said. “Hospitals are an essential service, they’re not inclined to fail and they’ve had a great run up to this point. But everybody knows credit won’t get better anytime soon and investors are overly cautious. No one wants to take the first jump. It’s a limited universe and bankers are conservative people by nature.”
To be sure, investors may balk at healthcare’s reimbursement risks, operating risks and regulatory risks, Korey adds, but maintains that his firm sees healthcare as a “safe haven.”
'RESET THE CLOCK’
Above all else, getting things going in the right direction will require “a resetting of the clock,” says Ron D’Vari, CEO of New York-based NewOak Capital. Only when that happens can lending resume and even then it will start small, he said.
“People tend to go to lesser complex areas first, so car loans and student loans will come back first, followed by mortgages and commercial real estate,” he said.
Indeed, the first credit dollars will flow toward residential loans and mortgages, Korey says, because the federal government is demanding it.
“They are taking extraordinary steps to invigorate this sector simply for the reason that it is good for the majority of the population,” he said. “The government will need to stabilize the exit or secondary market for these loans, but once they do, banks will flow capital to this market.”
At the same time, Korey believes the federal government will also commit to protecting the country’s senior population through healthcare programs, including maintaining a stable reimbursement environment.
“However, as for enticing banks or finance companies to come back to this market in a meaningful way, I think that banks will do so when lending to other sectors becomes competitive and yields shrink,” he said. “Healthcare lending has always commanded a decent yield for lenders as compared to residential or commercial property lending. Yet given the overall contraction in the credit markets, ‘safer’ asset classes will see dollars first before yield becomes relevant again.”
Bunton also agrees that investors are in “back to basics” mode, seeking “high credibility and low risk” for their money.
“From the recent meetings I’ve had with members of the banking community, they are still feeling shell shocked but it sounds like they are willing to work with people in order to help the recovery along,” he said. “It will take time ... people need to step back, take a hard look at the situation and figure out how to make it work.”