Hospitals may not have much control over the U.S. Supreme Court, reimbursement changes, or the capital markets, but here are eight simple yet effective steps for improving access to tax-exempt debt regardless of size or credit quality.
1. Educate the Board.
Hospital Board leadership ought to have a basic grasp of the capital markets, understand how investors and rating agencies look at credit risk, and play an active role in bondholder and rating presentations.
2. Integrate strategic and capital planning.
In addition to their strategic significance, capital projects should be evaluated and ranked based on their impact on ratings and the hospital's overall cost of funds.
3. Develop a rating strategy.
Understand what is important to rating analysts, set realistic targets for bond ratings, communicate proactively and regularly, and build a long-term relationship with each agency.
4. Proactively manage the balance sheet.
Understand the relationship between risk and cost of capital, identify and minimize balance sheet risk such as put debt and swaps, always be on the lookout for debt service savings, and plan renewals early.
5. Understand debt capacity.
There is almost always room for more debt, but on what terms? Be clear on how the organization’s leverage and overall balance sheet and profitability impacts access to debt and pricing.
6. Stay liquid.
Set a target for minimum days cash on hand and over-borrow if necessary to stay there. There is no other metric more important in preserving access to funding.
7. Diversify funding sources.
Take a portfolio approach to funding: bank debt, bonds, leases, monetization, philanthropy, etc. This also applies to lenders and investors. The capital markets can change quickly and the organization should always have a Plan B.
Disclose financial results and other material events regularly and consistently even if the organization doesn't have an immediate need; when the time comes, a track record of timely and quality disclosure will enhance investor interest.
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