Accessing Capital in a Tight Credit Market
After weathering last fall’s fiscal catastrophe, many hospital CFOs now find themselves in Bert Zimmerli’s position. Though Zimmerli is senior vice president and CFO of the only health care system in the country to receive the highest credit rating from both Standard & Poor’s Ratings Services and Moody’s Investors Service, he says that the financial outlook has changed drastically for Intermountain Healthcare, Salt Lake City, Utah. Noting that Intermountain is not immune to the issues affecting other hospitals, he says, “This is a difficult environment for borrowing money in the credit markets.”
For two years now, Intermountain, a not-for-profit health care system, has carried around $1.2 billion in tax-exempt debt. Last year, Zimmerli and his team had planned to add roughly $250 million in additional tax-exempt financing but those plans were put on hold due to failures in the market, particularly the collapse of large money-market mutual funds—once major purchasers of Intermountain bonds. 
Bert Zimmerli “Though a lot of organizations’ bonds were directly affected, ours never were,” Zimmerli recalls. “Having said that, for about five months in the tax-exempt market, even if you were able to issue debt, the interest rate shot up; fortunately, we weren’t in a position where we had to do the additional financing, so we were able to pull back, and we are currently awaiting an improvement in the market. On a short-term basis, we’ve negotiated a line of credit with three local banks, and we can draw on that when our cash is not sufficient.” In the meantime, capital expenditures have been trimmed to exclude anything not essential to strategy, safety, or compliance. Construction of two new hospitals, commenced before the financial crisis, continues apace, but Zimmerli says, “As we look to the future, we want a clearer view on where the economy is going. I don’t expect we’ll be starting any major expansion projects until then.”
Bill Pugh, CFO Bill Pugh, CFO of Harrisburg, Pennsylvania-based Pinnacle Health, a not-for-profit health system, has experienced a similar strategic upheaval. Two years ago, Pinnacle’s capital structure incorporated variable-rate weekly debt in the tax-exempt credit market with a blend of equity contributions to new capital investments. Today, he says that the health system is 180° from where it stood in 2007. “With the equity markets taking a downturn, that’s dried up some of the capacity we had in terms of cash and investments, and the unsettled credit markets have pushed us away from the variable-rate debt into a fixed-debt mode,” he says. “We’re now using leasing as an option for new technology, though we still use our internally generated capital from operations to fund 70% to 80% of our annual capital requirements.” Technology Acquisition: From Capital to Lease Given the difficult capital market, Pugh has explored alternatives when it comes to acquiring new technology, including using available capital from the vendor’s credit arm—particularly imaging equipment. “We’ve used Toshiba credit to provide leasing facilities for our imaging technology plan that we put into place a year ago,” he says. “That plan calls for a programmed replacement of some technology, as well as implementation of new technology in new locations. We looked at the entire imaging master plan in the context of lease-type facilities. That’s provided a low-cost access to capital that we previously didn’t feel we needed, but in this market, we had to look at different options.” Like Intermountain, Pinnacle was immersed in two major construction projects prior to the downturn in the markets; there, as well, the health system has had to consider alternatives to its customary financing structure. “We’ll be accessing the tax-exempt bond market for non–bank-qualified tax-exempt bonds through a direct lending relationship,” Pugh says. “That could be variable-rate or fixed-rate financing, and we’ll be doing it over the next 60 to 90 days.” Both CFOs emphasize the importance of a high credit rating—an aspect of operations that many facilities have been forced to consider more closely, given the tight lending market. “We are looking to improve our operating performance and our position in the marketplace,” Pugh says. “We want to be able to maintain or improve our credit rating in spite of the hard times.” Zimmerli says that Intermountain’s impeccable credit rating is a fundamental component of its long-term strategy. “From a strategic standpoint, it’s vital that we maintain our credit ratings, because that ultimately lowers our cost of debt,” he says. “We interact frequently with the rating agencies, always keeping them apprised of how we’re doing.” On an annual basis, Intermountain reports to both agencies on its five-year outlook, from both capital and operational standpoints. “We hold ourselves accountable,” Zimmerli notes. “We want to build strong credibility with them.” For Pugh, the easiest way to boost Pinnacle’s credit rating—thereby unlocking future access to a market that is currently all but off-limits—is to generate operating cash flow on a consistent, and improving, basis. “Our focus has been on improving our overall financial position,” he says. “Clearly, the economic downturn could have the opposite effect on those organizations that don’t respond adequately. I think the best strategy is to make sure you’re doing a good job operating the services you have, along with making sure you mitigate the economic pressures and losses that could occur.” Zimmerli concurs, adding that Intermountain’s not-for-profit status could be construed as an advantage in harsher financial climates because of the big-picture perspective it engenders. “In the public, for-profit world, you’re very beholden to your stockholders, and sometimes you have to make decisions that might not be best in the long term,” he says. “We’re not driven by quarterly earnings expectations. That’s a big advantage for us. We can truly operate with a long-term view.”
Bert Zimmerli “Though a lot of organizations’ bonds were directly affected, ours never were,” Zimmerli recalls. “Having said that, for about five months in the tax-exempt market, even if you were able to issue debt, the interest rate shot up; fortunately, we weren’t in a position where we had to do the additional financing, so we were able to pull back, and we are currently awaiting an improvement in the market. On a short-term basis, we’ve negotiated a line of credit with three local banks, and we can draw on that when our cash is not sufficient.” In the meantime, capital expenditures have been trimmed to exclude anything not essential to strategy, safety, or compliance. Construction of two new hospitals, commenced before the financial crisis, continues apace, but Zimmerli says, “As we look to the future, we want a clearer view on where the economy is going. I don’t expect we’ll be starting any major expansion projects until then.”
Bill Pugh, CFO Bill Pugh, CFO of Harrisburg, Pennsylvania-based Pinnacle Health, a not-for-profit health system, has experienced a similar strategic upheaval. Two years ago, Pinnacle’s capital structure incorporated variable-rate weekly debt in the tax-exempt credit market with a blend of equity contributions to new capital investments. Today, he says that the health system is 180° from where it stood in 2007. “With the equity markets taking a downturn, that’s dried up some of the capacity we had in terms of cash and investments, and the unsettled credit markets have pushed us away from the variable-rate debt into a fixed-debt mode,” he says. “We’re now using leasing as an option for new technology, though we still use our internally generated capital from operations to fund 70% to 80% of our annual capital requirements.” Technology Acquisition: From Capital to Lease Given the difficult capital market, Pugh has explored alternatives when it comes to acquiring new technology, including using available capital from the vendor’s credit arm—particularly imaging equipment. “We’ve used Toshiba credit to provide leasing facilities for our imaging technology plan that we put into place a year ago,” he says. “That plan calls for a programmed replacement of some technology, as well as implementation of new technology in new locations. We looked at the entire imaging master plan in the context of lease-type facilities. That’s provided a low-cost access to capital that we previously didn’t feel we needed, but in this market, we had to look at different options.” Like Intermountain, Pinnacle was immersed in two major construction projects prior to the downturn in the markets; there, as well, the health system has had to consider alternatives to its customary financing structure. “We’ll be accessing the tax-exempt bond market for non–bank-qualified tax-exempt bonds through a direct lending relationship,” Pugh says. “That could be variable-rate or fixed-rate financing, and we’ll be doing it over the next 60 to 90 days.” Both CFOs emphasize the importance of a high credit rating—an aspect of operations that many facilities have been forced to consider more closely, given the tight lending market. “We are looking to improve our operating performance and our position in the marketplace,” Pugh says. “We want to be able to maintain or improve our credit rating in spite of the hard times.” Zimmerli says that Intermountain’s impeccable credit rating is a fundamental component of its long-term strategy. “From a strategic standpoint, it’s vital that we maintain our credit ratings, because that ultimately lowers our cost of debt,” he says. “We interact frequently with the rating agencies, always keeping them apprised of how we’re doing.” On an annual basis, Intermountain reports to both agencies on its five-year outlook, from both capital and operational standpoints. “We hold ourselves accountable,” Zimmerli notes. “We want to build strong credibility with them.” For Pugh, the easiest way to boost Pinnacle’s credit rating—thereby unlocking future access to a market that is currently all but off-limits—is to generate operating cash flow on a consistent, and improving, basis. “Our focus has been on improving our overall financial position,” he says. “Clearly, the economic downturn could have the opposite effect on those organizations that don’t respond adequately. I think the best strategy is to make sure you’re doing a good job operating the services you have, along with making sure you mitigate the economic pressures and losses that could occur.” Zimmerli concurs, adding that Intermountain’s not-for-profit status could be construed as an advantage in harsher financial climates because of the big-picture perspective it engenders. “In the public, for-profit world, you’re very beholden to your stockholders, and sometimes you have to make decisions that might not be best in the long term,” he says. “We’re not driven by quarterly earnings expectations. That’s a big advantage for us. We can truly operate with a long-term view.”