Bor­row­ing di­rectly from the bank

More hos­pi­tals turn­ing to banks for di­rect-place­ment bor­row­ing

Modern Healthcare - - FRONT PAGE - Me­lanie Evans

Bor­row­ing by hos­pi­tals di­rectly from banks got a boost af­ter the credit cri­sis but bal­looned last year as hos­pi­tals look to re­duce ex­po­sure to po­ten­tially volatile debt. Banks loaned $1.7 bil­lion di­rectly to health­care bor­row­ers last year in bond deals that might have oth­er­wise been sold pub­licly, ac­cord­ing to data from Thom­son Reuters. That vol­ume of deals does not in­clude an­other $1.2 bil­lion bor­rowed in other pri­vately ne­go­ti­ated deals. The com­bined $2.9 bil­lion in pri­vate health­care lend­ing is an in­crease from $503 mil­lion in the prior year, the Thom­son Reuters data show (See chart be­low).

More hos­pi­tals have em­braced such deals, in which bonds are sold pri­vately, as an al­ter­na­tive to fi­nanc­ing ve­hi­cles that have proved riskier af­ter the credit cri­sis, ac­cord­ing to health­care fi­nance chiefs.

That was the case for the Cleve­land Clinic, which bor­rowed $42 mil­lion from a bank last year. The deal was the sys­tem’s first di­rect bank place­ment in roughly eight years, says Chief Fi­nan­cial Of­fi­cer Steve Glass. Of­fi­cials with the Ohio sys­tem sought to limit ex­po­sure to more volatile debt deals, known as vari­able-rate de­mand bonds, by fi­nanc­ing with a more sta­ble al­ter­na­tive.

And banks ap­pear ea­ger to lend. RBC Cap­i­tal Mar­kets con­ducted its first di­rect place­ment deal in 2008 and has since pur­chased $1.5 bil­lion in health­care bonds, says Kath­leen Cos­tine, man­ag­ing di­rec­tor of RBC Cap­i­tal Mar­kets’ health­care fi­nance group. Wells Fargo be­gan to in­crease its di­rect lend­ing roughly 2½ years ago, says Adam Joseph, a Wells Fargo Se­cu­ri­ties man­ag­ing di­rec­tor in public fi­nance cap­i­tal strate­gies.

A large ap­petite

“I’ve never seen his much bank ap­petite” for di­rect loans to bor­row­ers, says Mark Me­lio, founder of health­care fi­nan­cial ad­vi­sory firm Me­lio & Co., based in North­field, Ill. Mul­ti­ple banks com­pete for deals and have agreed to lend $100 mil­lion to $150 mil­lion di­rectly to bor­row­ers with strong credit rat­ings, Me­lio says. He says that such ca­pac­ity ap­pears to have tight­ened some­what in re­cent months, but de­mand from bor­row­ers and banks for the deals con­tin­ues so far this year.

Johns Hop­kins Health Sys­tem bor­rowed di­rectly from a bank for the first time last month.

The $53 mil­lion deal di­ver­si­fied the sys­tem’s debt port­fo­lio with­out adding a risk com­mon to vari­able-rate de­mand bonds, says Stu­art Erd­man, se­nior di­rec­tor of fi­nance for Bal­ti­more-based Johns Hop­kins.

Vari­able-rate de­mand bonds are of­ten backed by bank let­ters of credit, which act as a credit guar­an­tee for in­vestors. But when banks’ credit strength fal­ters, as it has in re­cent years, in­vestors grow more wary of such guar­an­tees and in­ter­est rates might climb. Hos­pi­tals must also re­new let­ters of credit with banks fre­quently—which cre­ates the risk banks may not re­new or may charge more to do so.

Erd­man says Johns Hop­kins, which owns six hos­pi­tals, is seek­ing to re­duce its ex­po­sure to let­ters of credit.

“That’s our goal now,” he says. So when of­fi­cials con­sid­ered how best to re­fi­nance a loan, they looked for other op­tions, which in­clude fixed-rate bonds and pri­vate place­ment with other in­vestors.

Banks com­peted ag­gres­sively for the sys­tem’s busi­ness as they made their first di­rect place­ment, he says. Johns Hop­kins pur­sued such a deal for the first time be­cause di­rect bank deals were not pre­vi­ously as avail­able or as cheap.

“If they were avail­able, they weren’t avail­able at a good price,” Erd­man says.

Three of eight banks of­fered bids that were less costly than let­ter of credit deals. Johns Hop­kins ul­ti­mately closed the di­rect bank deal for less than a let­ter of credit, he says.

The di­rect deals aren’t with­out risk. Banks typ­i­cally agree to deals of three, five or seven years and hos­pi­tals may be forced to re­fi­nance. “Mar­kets change,” Erd­man says. De­mand from bor­row­ers or bank ap­petite for di­rect deals could dis­ap­pear in com­ing years.

Banks too may be look­ing to move away from let­ters of credit.

Joseph of Wells Fargo says ex­pe­ri­ence dur­ing the na­tion’s re­cent fi­nan­cial up­heaval made the di­rect bank deals more at­trac­tive.

Banks and bor­row­ers de­vel­oped a “shared fear” that let­ters of credit could change bor­row­ing costs and de­mand on bal­ance sheets overnight, he says. When in­vestors no longer want hospi­tal bonds, banks must honor let­ters of credit by buy­ing up the debt—as was the case dur­ing the na­tion’s re­cent fi­nan­cial

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