As the credit markets tightened over the last few years, many U.S. hospitals grew increasingly risk-averse and sought ways to improve their credit terms on financing deals.
Richard (Dick) Showalter Jr., the treasurer of the Dartmouth-Hitchcock Health System in Lebanon, N.H., said his health system had chosen to shoulder more risk in past financing deals. But with the credit markets in crisis, he said he was forced to reassess.
“Like a lot of organizations we felt we had taken on too much risk,” Showalter said. “We wanted to find a way to lower the cost of capital.”
The solution for Showalter was private placement financing. A private placement is a tax-exempt loan between a not-for-profit or municipal borrower and a single lender or small syndicate of lending institutions. The loan terms are negotiated privately.
Dartmouth-Hitchcock has used multiple lenders for private placement deals, including Wells Fargo, Bank of America and GE Capital.
“We refinanced $100 million of the debt on Mary Hitchcock Memorial Hospital with Bank of America in order to get better rates,” Showalter said. “We used GE Capital to refinance $28 million on two different issues. We’ve found that the credit terms in private placements are more acceptable to us.”
According to Randy Waring of GE Healthcare Financial Services, tax-exempt private placements generally require no financial covenants, credit enhancement, debt service reserve funds, bond rating, official statement or other public disclosure. For collateral, most lenders hold a secured lien on the assets financed.
“In general, private placements make the most sense on transactions below $50 million and for shorter-term issues below 20 years,” he said. “What would surprise a lot of people is that, for a transaction that’s not too big or too long, you can get a total cost of financing on a private deal that’s lower than the public market.”
Ken Jensen, chief financial officer at the ValleyCare Health System in Livermore, Calif., said many not-for-profit health systems are unaware of the private placement option.
“We did a private placement on taxable bonds for $20 million,” he said. “Private placement is a lot faster and easier than going to the public market. There were no hearings and no insurance required.”
ValleyCare didn’t have an excellent credit rating when deciding to go the private placement route, Jensen said, a condition that’s not uncommon among California hospitals in the wake of the recession. The insured rate at ValleyCare has dropped from 39 percent to 27 percent over the past four months, undermining the health system’s financial status.
“Private placement is going to be increasingly attractive because of the condition many hospitals are in,” Jensen said. “A lot of hospitals got wrapped up in auction rate bonds and lost a lot when they ultimately had to buy back the bonds. Balance sheets are weakened these days, there are more cost pressures and access to capital is difficult.”