capital financial planning capital financial planning presented by: richard l. rollins rollins...
TRANSCRIPT
Capital Financial PlanningPresented by:
Richard L. Rollins
Rollins Capital Strategies
for
West Virginia HFMA, January 15, 2015
Rollins Capital Strategies 2
AGENDA
• Overview of Debt Issuance Process
• Common Mistakes
• Evaluating Debt Capacity
• Potential Risk Areas
• Financing Alternatives
Rollins Capital Strategies 3
OVERVIEW OF DEBT ISSUANCE PROCESS
•Capital Planning Should be Part of
Strategic Planning Process
•Everything You do, How You Operate and the
Services You Provide Should be Based on
Your Strategic Plan
Rollins Capital Strategies 4
OVERVIEW OF DEBT ISSUANCE PROCESS
• Define Project
• Evaluate Debt Capacity
• Make Go/No Go Decision
• Select Architect
• Prepare and Submit Certificate of Need
Rollins Capital Strategies 5
OVERVIEW OF DEBT ISSUANCE PROCESS
• Select Investment/Mortgage Banker
• Make Decision on Type of Financing
• Select Feasibility Consultant, if Required
• Prepare Feasibility Study, or Agreed-Upon
Procedures Report
Rollins Capital Strategies 6
OVERVIEW OF DEBT ISSUANCE PROCESS
• Finalize Architectural Plans
• Select General Contractor
• Submit Application to Lending Organization or
Present to Rating Agencies
• Finalize Debt Documents
• Price and Sell Bonds
Rollins Capital Strategies 7
COMMON MISTAKES
• Deciding to Move Forward With Expansion When
Your Financials Cannot Support the Debt
• Piecemeal Approach to Financing and Facility
Renovation/Expansion
• Renovating a Facility That Should Be Replaced
• Consuming Scarce Debt Capacity Without Gaining
any Strategic Advantage
Rollins Capital Strategies 8
EVALUATE DEBT CAPACITYIf You Do Not Know How Much You Can Afford, You
Will Waste Money!!
• Prepare Five Year Forecasts
• Estimate Future Demand for Services
• Service Area Definition
• Population
• Admissions/1000 Population
• Market Share (Yours and Competition’s)
Rollins Capital Strategies 9
EVALUATE DEBT CAPACITY• Forecast Critical Operating Assumptions
• FTE’s/ Adjusted Occupied Bed
• Inflation Adjustments
• Contractual Adjustments
• Routine Capital Expenditures
• Days in Accounts Receivable
• Healthcare Reform
Rollins Capital Strategies 10
EVALUATE DEBT CAPACITY
• Estimate Impact of Healthcare Reform
• Payment Reductions
• Reduction in Uninsured Population
• What Happens if State Doesn’t Expand Medicaid
• Impact on Bad Debt/Charity Care
• Estimated Reimbursement for Exchange Patients
• Impact on Other Insurers
Rollins Capital Strategies 11
EVALUATE DEBT CAPACITY
•Evaluate Different Borrowing Scenarios
•Estimate Project Cost Associated With Each
Debt Scenario
•Evaluate the Level of Debt You Can Afford
and Still Meet Your Other Financial Goals and
Obligations
Rollins Capital Strategies 12
EVALUATE DEBT CAPACITY
•Evaluate Key Ratios
•Operating Margin
•Debt Service Coverage
•Days Cash on Hand
•Debt to Capitalization
•Compare Ratios to Industry Standards
Rollins Capital Strategies 13
EVALUATE DEBT CAPACITY
• If Debt Capacity Does Not Meet Facility Needs,
Develop Plan to Bring Them Into Synch
• Reduce Facility Expectations
• Reduce Staffing
• Reduce Other Costs
• Develop Physician Recruitment Plan
• Etc.
Rollins Capital Strategies 14
POSITION YOUR FINANCIALS AND FORECASTS
• Think Long Term
• Grow Cash – Cash is King
• Maintain Strong Operating Margins
• Maintain Debt Service Coverage
• Prepare Realistic Budgets and Then Meet or Exceed
Expectations
• Compare to Rating Agency Medians
Rollins Capital Strategies 15
POTENTIAL RISK AREAS• Potential Risk Areas
• Days Cash on Hand, Debt Service Coverage
• Economic Issues in Service Area
• Medical Staff Issues
• Third Party Reimbursement
• Healthcare Reform
• Market Consolidation
Rollins Capital Strategies 16
FINANCING ALTERNATIVES
• Traditional Bonds
• FHA Section 242 (HUD)
• USDA Direct
• USDA Guaranteed
• Non-Investment Grade Bonds
• Bank Qualified Loan
Rollins Capital Strategies 17
TRADITIONAL BONDS
•Advantages• Somewhat Quicker Process
• Lower Issue Costs
•Disadvantages• Debt Covenants
• Rating Agency Scrutiny
Rollins Capital Strategies 18
TRADITIONAL BONDS – PROCESS OVERVIEW
•Submit Information to Investment Banker• Designed for Investment Banker to Evaluate Credit
•Present Forecasted Financial Statements and
Other Data to Rating Agencies
•Loan Closing
Rollins Capital Strategies 19
FHA SECTION 242• Advantages
• Non-Recourse
• 90% Loan to Value
• Comparatively Low Interest Rates
• Manageable Loan Covenants
• Disadvantages• Somewhat Higher Issue Costs
• Bureaucratic Process
Rollins Capital Strategies 20
FHA SECTION 242 – PROCESS OVERVIEW
• Level 1 Review by HUD
• To Make Sure You Meet Basic HUD Requirements
• Pre-Application Meeting
• Designed for the Hospital to Tell Their Story and
for HUD to Decide Whether the Hospital Should
Submit Application
• Submit Application
Rollins Capital Strategies 21
USDA DIRECT• Advantages
• Low Interest Rates, 3.5% - 4.5%
• Lower Issue Costs
• Disadvantages
• Applies Only After Project Completion
• Funds Limited by Annual Appropriation
• Bureaucratic Process
Rollins Capital Strategies 22
USDA DIRECT – PROCESS OVERVIEW
• Pre-Application Meeting
• Designed for Hospital to Tell Story and for USDA to
Decide Whether Hospital Should Submit Application
• Submit Application
• Designed for USDA to Review Application, Decide
on Level of USDA Direct Funding and to Decide
Whether to Approve Loan
Rollins Capital Strategies 23
USDA GUARANTEED LOAN
• Advantages
• Lower Issue Costs
• Disadvantages
• Applies Only After Project Completion
• Bureaucratic Process
• Higher Interest Rates Than Direct Program
Rollins Capital Strategies 24
USDA GUARANTEED LOAN – PROCESS OVERVIEW
• USDA Guarantees 80% - 90% of Debt – Remainder of Risk
Assumed by Outside Bank
• Pre-Application Meeting
• Designed for the Hospital to Tell Their Story and for USDA
to Decide Whether the Hospital Should Submit Application
• Submit Application
• Designed for USDA to Review Application, Decide on
level of Funding and Decide Whether to Approve loan
• Loan Closing
Rollins Capital Strategies 25
NON-INVESTMENT GRADE BONDS
• Advantages• Quicker Process
• Lower Issue Costs
• Disadvantages• Debt Covenants
• Risks• Interest Rates
Rollins Capital Strategies 26
NON-INVESTMENT GRADE BONDS – PROCESS OVERVIEW
•Submit Application
•Designed for Investment Banker to
Review and Approve Loan
•Loan Closing
Rollins Capital Strategies 27
BANK QUALIFIED LOAN
•Advantages• Quicker Process
• Lower Issue Costs
•Disadvantages• $10 Million Limit
Rollins Capital Strategies 28
BANK QUALIFIED LOAN – PROCESS OVERVIEW
•Submit Application
•Designed for Investment Banker to
Review and Approve Loan
•Loan Closing
Rollins Capital Strategies 29
SUMMARY• Capital Planning Should be Part of Strategic
Planning Process
• Never Design Project Without Knowing Debt
Capacity
• Evaluate Available Financing Options
• Depending on Financing Decision, Hire Individuals
Who are Knowledgeable of Process
• Position Financials for Success
Rollins Capital Strategies 31
Richard L. Rollins
Rollins Capital Strategies
Roswell, Georgia
(919)618-4698