iProtean—Bond Financing Part 1

Preliminary medians data for fiscal year 2011, recently released by Moody’s Investors Service, show sluggish top line revenue growth, flat inpatient admissions, but an improved bottom line profitability due to expense reductions.  Overall, the rating agency noted that the data support its negative outlook for hospitals in 2012.


“ . . . we believe there are several key developments evident in this preliminary data, including:

  • Operating performance showed stability, as revenue growth rebounded slightly and expense growth was controlled.
  • Balance sheet measures continue to strengthen as hospitals defer capital spending.
  • Exposure to governmental payers as a source of revenue continues to grow.”

(Median Report: Not-for-Profit Hospital Medians Drive Expectation of Low Revenue Growth Given Flat Volume Trends, Payer Pressures, Moody’s Investors Service, April 2012)


The iProtean course Bond Financing Part 1 covers the basics of tax-exempt bond financing including the importance of rating agencies’ assessments of a hospital’s/system’s creditworthiness for taking on capital debt.  Healthcare finance experts Marian Jennings (M. Jennings Consulting), Lisa Goldstein (Moody’s Investors Service), Michael Irwin (CitiGroup) and Eric Jordahl (Kaufman, Hall & Associates) discuss tax-exempt financing, investor benefit, funding sources, credit rating agencies and core elements of good governance from the rating agency perspective.


Marian Jennings, M. Jennings Consulting

A bond is a debt instrument . . . It is like a loan, but the way to think about it is that when you are issuing a tax-exempt bond, you are going through an ‘authority.’  It is a very specific debt instrument by which the hospital can access capital that it has agreed to repay at a certain interest rate over a certain timing . . .


Michael Irwin, CitiGroup

Many years ago hospitals relied on their local bank to provide them with both the working capital and the capital they needed for expansion projects, renovation projects and medical equipment.  Over time, particularly larger organizations recognized that the public debt markets, specifically municipal bonds [tax-exempt bonds], provided them with a form of long term capital that gave them a lower cost and more advantages in terms of the repayment period . . . with the ability to better plan and know for sure what their debt service obligations will be for a specific project over a long period of time.  Obviously that’s a terrific advantage to an organization . . .


Lisa Goldstein, Moody’s Investors Service

Tax-exempt bond financing can be a very efficient and economical way to access the capital markets to fund future capital needs.  Not-for-profit hospitals can issue tax-exempt debt or bonds on the market for three primary purposes.  One is for future capital needs, so for example building a new patient tower.  The second reason would be to refinance existing debt like you refinance a mortgage for a lower interest rate for savings and the third reason or acceptable way to issue tax exempt debt is to reimburse the hospital for prior capital expenditures . . .


Michael Irwin, Citigroup

The municipal bond market offers not-for-profits the advantage of a lower interest rate and more certain terms of repayment over a long period of time and, thereby, provides the organization with a certainty about how much the cost of borrowing those bonds is going to affect them each year—over as much as a thirty year period.  Other types of bonds include corporate, for-profit taxable bonds.  These are less frequently used by not-for-profits because the interest rate isn’t as low and very often the terms are not as advantageous as they would be in the tax-exempt market . . .


Eric Jordahl, Kaufman, Hall & Associates

Bond ratings are absolutely essential from a capital markets’ perspective, but also from a strategic perspective.  Bond ratings are one of the absolute most important things that a hospital can have and work to protect over time . . . The importance of a bond rating is that it drives two things.  One is the absolute amount of capital that can be accessed, so how much debt can an organization get, and then equally important, what’s the cost of that capital.  There is a significant spread between the funding cost for a double A organization versus the funding cost for a non-investment grade rated organization.


The cost of risk in the world today is materially higher than it has been frankly for as long as I can remember, across all different markets, but particularly fixed income markets.  There are certain pieces of the fixed income markets in particular where risk has become fairly expensive and that’s true in the not-for-profit healthcare sector.  That reinforces that importance of a credit rating.


Lisa Goldstein, Moody’s Investors Service

In assessing the credit worthiness or a rating of a not-for-profit hospital, there are five key factors that rating agencies examine.  In no particular order they are financial performance . . . capital and balance sheet management . . .  the legal package that supports or backs the public debt that is being offered . . . market forces . . . and governance and management.


We make our opinions and glean our understanding of management and governance through the initial meeting with the not-for-profit hospital as well as the annual updates where we engage with management and board members.  We use comparisons between hospitals to make our assessments of management.  We look at financial performance as an indicator of governance and management.  If a hospital is meeting, if not exceeding, its budget every year, we believe it’s a reflection on good governance and good management.  Likewise if the hospital continues to miss its budget every year, it’s also a reflection of governance and management and maybe some of the short falls that need to be addressed.  While it’s hard to quantify in certain ratios unlike financial performance or market share, management and governance is extremely important in our assessment of the ratings.


For a complete list of iProtean courses, click here.


iProtean Symposium & Workshop

Mark the Date!! October 10 – 12, 2012 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Barry Bader, Dan Grauman, Marian Jennings and Brian Wong, M.D. For more information, click here.


For more information about iProtean, click here.