Capital Financial Planning Capital Financial Planning Presented by: Richard L. Rollins Rollins Capital Strategies for West Virginia HFMA, January 15, 2015

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


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



• Define Project

• Evaluate Debt Capacity

• Make Go/No Go Decision

• Select Architect

• Prepare and Submit Certificate of Need



• Select Investment/Mortgage Banker

• Make Decision on Type of Financing

• Select Feasibility Consultant, if Required

• Prepare Feasibility Study, or Agreed-Upon

Procedures Report



• Finalize Architectural Plans

• Select General Contractor

• Submit Application to Lending Organization or

Present to Rating Agencies

• Finalize Debt Documents

• Price and Sell Bonds


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


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)


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


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



•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



•Evaluate Key Ratios

•Operating Margin

•Debt Service Coverage

•Days Cash on Hand

•Debt to Capitalization

•Compare Ratios to Industry Standards



• 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.


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


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


FINANCING ALTERNATIVES

• Traditional Bonds

• FHA Section 242 (HUD)

• USDA Direct

• USDA Guaranteed

• Non-Investment Grade Bonds

• Bank Qualified Loan


TRADITIONAL BONDS

•Advantages• Somewhat Quicker Process

• Lower Issue Costs

•Disadvantages• Debt Covenants

• Rating Agency Scrutiny


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


FHA SECTION 242• Advantages

• Non-Recourse

• 90% Loan to Value

• Comparatively Low Interest Rates

• Manageable Loan Covenants

• Disadvantages• Somewhat Higher Issue Costs

• Bureaucratic Process


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


USDA DIRECT• Advantages

• Low Interest Rates, 3.5% - 4.5%


• Disadvantages

• Applies Only After Project Completion

• Funds Limited by Annual Appropriation



USDA DIRECT – PROCESS OVERVIEW


• Designed for Hospital to Tell Story and for USDA to

Decide Whether Hospital Should Submit Application


• Designed for USDA to Review Application, Decide

on Level of USDA Direct Funding and to Decide

Whether to Approve Loan


USDA GUARANTEED LOAN

• Advantages


• Disadvantages

• Applies Only After Project Completion


• Higher Interest Rates Than Direct Program


USDA GUARANTEED LOAN – PROCESS OVERVIEW

• USDA Guarantees 80% - 90% of Debt – Remainder of Risk

Assumed by Outside Bank


• Designed for the Hospital to Tell Their Story and for USDA

to Decide Whether the Hospital Should Submit Application


• Designed for USDA to Review Application, Decide on

level of Funding and Decide Whether to Approve loan

• Loan Closing


NON-INVESTMENT GRADE BONDS

• Advantages• Quicker Process


• Disadvantages• Debt Covenants

• Risks• Interest Rates


NON-INVESTMENT GRADE BONDS – PROCESS OVERVIEW

•Submit Application

•Designed for Investment Banker to

Review and Approve Loan

•Loan Closing


BANK QUALIFIED LOAN

•Advantages• Quicker Process


•Disadvantages• $10 Million Limit


BANK QUALIFIED LOAN – PROCESS OVERVIEW

•Submit Application

•Designed for Investment Banker to

Review and Approve Loan

•Loan Closing


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


Questions & Answers


Richard L. Rollins

Rollins Capital Strategies

Roswell, Georgia

(919)618-4698

[email protected]

mailto:[email protected]