Montefiore Health scores $1.2 billion financing deal that will add $600 million to flagship hospital’s balance sheet

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The financing package is a hybrid of taxable and nontaxable bonds that will reimburse the system for more than $350 million in capital projects.

Montefiore Health System has landed a $1.2 billion financing deal with the Dormitory Authority of the State of New York that will add roughly $600 million of cash to Montefiore Medical Center’s coffers.

The bonds issued by DASNY were 30-year revenue bonds that were used to pay down $315 million in prior bonds insured by the Federal Housing Administration, including bonds backed by securities guaranteed by the Government National Mortgage Association. The new bonds issued also reimburse Montefiore for $357 million in past capital project spending on its facilities and take advantage of low interest rates in the market, the system said.

The system confirmed that the revenue bonds were secured by a pledge of gross receipts of Montefiore Medical Center and a mortgage on the Moses Division’s primary care facilities and its two parking garages. The new bonds were used to refinance existing bonds and loans as well as reimburse the health system for prior capital expenditures.

“The financing benefits the system by refinancing front-loaded debt to achieve a more level debt service structure and implements a flexible financing structure that can support future initiatives,” a spokesperson said.

According to a recent report from Moody’s Investors Service, the proceeds of the Series 2018 bonds will be used to refinance existing debt including FHA insured bonds, and will add about $600 million of cash to MMC’s balance sheet.

Moody’s assigned an initial Baa2 rating to Montefiore Obligated Group’s $1.2 billion in revenue bonds, which are a hybrid of both taxable and nontaxable bonds. Moody’s also gave a rating outlook of stable.

“Montefiore Obligated Group’s Baa2 rating reflects Moody’s belief that Montefiore Health System will maintain a leading market position in the Bronx, supported by its clinical excellence and its flagship position as the primary teaching hospital for the Albert Einstein College of Medicine (AECOM). Montefiore’s rating also reflects its experience with value based contracting, which will be aided by integration with its large base of faculty practice and primary care physicians,” Moody’s said.

“With this bond rating, Montefiore can continue our leadership in developing risk-based care and delivering care in the most appropriate settings at the right time. In the rating, Montefiore was noted for its clinical excellence, care, and its ability to attract internationally renowned physician scientists, complementing Albert Einstein College of Medicine’s long history of pioneering medical research,” Montefiore said in a statement.

Moody’s also cautioned that the system’s “keen commitment to its community and surrounding counties” could mean uncertainty, as some of MHS’s affiliated hospitals will experience losses despite state funding. The agency also said the med school’s financial issues will require cash support from Montefiore and unusually high levels of Medicaid and a “heavily unionized” workforce will also strain the system’s margins.

Montefiore is a major medical system in the New York metro area that includes three inpatient campuses with 1,558 licensed beds in the Bronx, as well as several other affiliated organizations in Westchester, Rockland and Orange Counties. Its hospitals include the 292-bed White Plains Hospital, 121-bed Montefiore Mount Vernon Hospital, 223-bed lMontefiore New Rochelle Hospital, 375-bed Nyack Hospital, 242-bed St. Luke’s Cornwall Hospital, and 150-bed Burke Rehabilitation Hospital. Montefiore Medicine Academic Health System is the parent above MHS that controls its Albert Einstein College of Medicine.


Hospital Distress to Grow If Congress Closes Door to Muni Market

  • Small, lower-rated facilites could see costs rise 1-2 percent
  • At least 26 non-profit hospitals already in default, distress

As Congress moves to assemble the final version of its tax plan, projects like Spooner, Wisconsin’s 20-bed hospital hang in the balance.

The rural community, about 110 miles (177 kilometers) northeast of Minneapolis, sold tax-exempt bonds to build the $26 million facility it opened last May. The hospital’s chief executive officer said that if its access to such low cost financing had been cut off it would have paid over $6 million more in interest.

That may soon be an expense that other hospitals across the country will have to shoulder. The House’s tax legislation revokes non-profit hospitals’ ability to raise money in the municipal market, where investors are willing to accept lower interest rates because the income is exempt from federal taxes. That’s threatening to saddle health-care providers with higher borrowing costs at a time when their finances are already under pressure.

“Should tax-exempt financing not be available in the future, it may really harm our ability to build affordable senior housing and assisting living facilities,” said Michael Schafer, Spooner Health’s CEO.

For small, rural hospitals across the country, labor, drug, and technology costs are increasing faster than the revenue and patients’ unpaid debts are on the rise. Higher financing costs would be one more challenge.

David Hammer, head of municipal bond portfolio management for Pacific Investment Management Co., said the loss of the tax-exemption could raise borrowing costs by 1 to 2 percentage points at small facilities with a BBB rating or below. That “could have a meaningful impact on their balance sheets,” he said.

At least 26 non-profit hospitals are already either in default or distress, meaning they’ve notified bondholders of financial troubles that make bankruptcy more likely, according to data compiled by Bloomberg. That includes falling short of financial terms set by their debt agreements and having too little cash on hand.

Many of them are based in rural communities where the populations tend to be “older, poorer and sicker,” according to Margaret Elehwany, the vice president of government affairs and policy at the National Rural Health Association. She estimates that about 44 percent of rural hospitals operate at a loss. There have been at least seven municipal bankruptcy filings by hospitals since last year, the most of any municipal sector excluding Puerto Rico.

The risk that Congress will prevent hospitals from accessing the municipal market worries Dennis Reilly, the executive director of the Wisconsin Health & Educational Facilities Authority, an agency that issues debt for non-profits such as Spooner Health.

“All of us in the industry were completely blindsided by the House proposal,” Reilly said in an interview from Washington, where he was meeting with members of Congress about the proposed bill.

“Without tax-exempt financing, not-for-profits across the country will have increased borrowing costs of 25 to 35 percent because they’ll have to access the taxable market,” he said. “For many of the rural providers like Spooner, much of their project they would not have been able to do with the higher cost of capital.”

A Rush to Beat the Clock

Hospitals are among those rushing to issue tax-exempt debt while they still can. Mercy Health, a Catholic health-care system that operates in Ohio and Kentucky, is scheduled to sell $585 million tax-exempt bonds next week. The deal, originally planned for early next year, was moved up after the release of the House proposal.

Spending more on debt would cut into the funds available for facilities, equipment and charitable outreach, like programs for opioid addiction, according to Jerome Judd, Mercy’s senior vice president and treasurer. “Things like that are impacted,” he said.

At least some members of Congress share the hospital executives’ concerns. Last month, some Republican lawmakers sent a letter to leadership pushing for the final plan to preserve the ability of hospitals and other entities, like affordable housing agencies and universities, to issue tax-exempt bonds.

“Private activity bonds finance exactly the sort of private public partnerships of which we need more of, not less,” they wrote. “These changes are incompatible with President Trump’s priority for infrastructure investment in the United States.”

It’s Tough to be Small

Some hospitals already opt to sell their bonds in the taxable municipal market to avoid disclosures and restrictions over how the proceeds are used, though they are typically larger entities that can secure advantageous rates because of the size of their deals. Patrick Luby, a municipal analyst at CreditSights, said smaller clinics with only a few million of bonds to sell would have a hard time accessing that market, which attracts corporate debt investors accustomed to big issues.

“Even what we would consider a large deal in the muni market is almost an odd lot in corporate bonds,” he said. “Very large hospital chains, large household name universities — global investors will buy those names, but they’re not going to buy a $15, $25, $50 million local hospital.”

If the House plan is enacted, hospitals “will have a really difficult time accessing the market,” he said.


Healthcare lobbyists not optimistic on changing GOP tax bill

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Healthcare lobbyists are scrambling to win changes in congressional Republican tax legislation, as Senate and House GOP leaders race to merge their separate bills into something both chambers can pass on a party-line vote this month.

But provider, insurer and patient advocacy groups doubt they can convince Republicans to remove or soften the provisions they find most objectionable. They say GOP leaders are moving too fast and providing too little opportunity for healthcare stakeholders to provide input.

“It’s a madhouse,” said Julius Hobson, a veteran healthcare lobbyist with the Polsinelli law firm. “What you worry about is this will get done behind closed doors, even before they start the conference committee process.”

One factor that could slow the rush to pass the Tax Cuts and Jobs Act is the need to pass a continuing resolution this week to fund the federal government and prevent a shutdown. Unlike with the tax bill, Republicans need Democratic support for that, and it’s not clear they’ll make the concessions Democrats are demanding.

Industry lobbyists are particularly targeting provisions in the House and Senate tax bills limiting tax-exempt financing for not-for-profit hospitals and other organizations; repealing the Affordable Care Act’s tax penalty for not buying health insurance; ending corporate tax credits for the cost of clinical trials of orphan drugs; and taxing not-for-profit executive compensation exceeding $1 million.

If the ACA’s insurance mandate is repealed, “our plans will have to evaluate whether they can stay in the individual market or not based on what it does to enrollment and the risk profile of people who choose to stay,” said Margaret Murray, CEO of the Association for Community Affiliated Plans, which represents safety net insurers.

AARP and other consumer lobbying groups are fighting to save the household deduction for high healthcare costs, which the House version of the Tax Cuts and Jobs Act would abolish.

Healthcare lobbyists also are warning lawmakers that capping or ending the federal tax deduction for state and local taxes will force many states to cut Medicaid. Beyond that, they say slashing taxes and increasing the federal deficit will trigger immediate Medicare budget sequestration cuts that would hurt providers and patients, particularly in rural and low-income areas.

“One in three rural hospitals are at financial risk of closure, and sequestration would be devastating for them,” said Maggie Elehwany, vice president of government affairs for the National Rural Health Association. “I’d love to say our message is getting through. But Congress is completely tone-deaf on how troubling the situation in rural America is.”

Hospital groups, led by the American Hospital Association, are battling to preserve tax-exempt bond financing for not-for-profit organizations, which the House bill would zero out. While the Senate bill would keep the tax exemption for interest income on new municipal private activity bonds, both the Senate and House bills would prohibit advance re-funding of prior tax-exempt bond issues.

Hospitals say ending or limiting tax-exempt bond financing would jack up their borrowing costs and hurt their ability to make capital improvements, particularly for smaller and midsize hospital systems. The Wisconsin Hospital Association projected that ending tax-exempt bond financing would increase financing costs by about 25% every year.

According to Merritt Research Services, outstanding end-of-year hospital debt totaled nearly $301 billion in long-term bonds and nearly $21 billion in short-term debt. Nearly all of that debt was issued as tax-exempt bonds.

Suggesting a possible compromise, Rep. Kevin Brady (R-Texas), chairman of the House Ways and Means Committee, said Tuesday that he saw “a good path going forward” to preserve tax-exempt private activity bonds “that help build and enhance the national infrastructure.”

But Hobson raised questions about Brady’s comments. “What is his definition of infrastructure?” he asked. “It suggests they may move away from a blanket repeal, but it doesn’t tell me where they’re going.”

If Republicans decided not to repeal the tax exemption for municipal bond interest income, however, they would have to scale back some of their pet tax cuts for corporations and wealthy families, even as they feel pressure to ease unpopular provisions such as ending the deductibility of state and local taxes. That could make it hard for hospital lobbyists to gain traction on this issue.

“There are a lot of giveaways in the bills that don’t leave a lot of room to recoup the money you lose,” Hobson said.

Some lobbyists hold out a faint hope that the Republicans’ tax cut effort could collapse as a result of intra-party differences, as did their drive to repeal and replace the Affordable Care Act.

One possibility is that Maine Sen. Susan Collins flips and votes no on the tax cut bill emerging from the conference committee if congressional Republicans fail to pass two bipartisan bills she favors to stabilize the individual insurance market.

Collins said she’s received strong assurances from Senate Majority Leader Mitch McConnell and President Donald Trump that they will support the bills to restore the ACA’s cost-sharing reduction payments to insurers and establish a new federal reinsurance program that would lower premiums.

But the fate of those bills is in doubt, given that House Speaker Paul Ryan (R-Wis.) was noncommittal this week, while House ultraconservatives have come out strongly against them.

Collins conceivably could be joined by Alaska Sen. Lisa Murkowski, who also said she wants to see the market stabilization bills passed. If Tennessee Sen. Bob Corker, who voted no on the tax cut bill over deficit concerns, remains opposed, those three GOP senators could sink the tax bill.

“We’d all like to see Collins pull her vote,” Hobson said. “It was always clear that the deal she cut with McConnell won’t fly on the House side.”

One healthcare lobbyist who didn’t want to be named said there may be a deal in the works for House conservatives to support market-stabilization legislation in exchange for lifting budget sequestration caps on military spending.

But healthcare lobbyists are not holding their breath on winning major changes or seeing the tax bill collapse.

“There are chances they won’t reach a deal,” said Robert Atlas, president of EBG Advisors, which is affiliated with the healthcare law firm Epstein Becker Green. “By the same token, Republicans are so determined to pass something that they might just come together.”

Tax Reform Hurts Hospital Financing, Patients Will Bear The Cost

There are 450 dense pages in the legislation recently passed by the U.S. House of Representatives to change the tax code and another 467 in the Senate version. It is sweeping and complex. Most people understandably focus on the new individual rates: will it save or cost them money?

But with both 30-plus years of public finance experience and as a former Congressional aide, I approach this tax code legislation differently. I ask, how might some of the other proposed changes affect the lives of the average American?

While I found many parts of the proposed law are likely to have a pronounced impact, there was one I focused on in particular. Buried deep — on Page 288, Subtitle G, Section 3601, starting on Line 13 to be exact — was a provision eliminating the ability of local community hospitals to borrow money at favorable tax-exempt rates.

It is technical financial stuff; even my eyes glaze over a bit.

But let me break it down for you: Did you spend any time in a hospital this year? Or maybe a family member, friend, or loved one did?

You probably answered yes. I know I did. Almost everyone knows someone who was recently in a hospital. Some are big, internationally known institutions like the Mayo Clinic. Others, such as Baylor University Medical Center, are teaching facilities. Some have religious affiliations — Catholic Health Initiatives is a good example. But most likely the hospital you were thinking about was your local community hospital. There are more than 4,800 community hospitals around the nation. While there are some large ones, most are just small hospitals, like the 25-bed Pawnee Valley Community Hospital in Larned, Kansas, with doctors and nurses working hard to serve rural communities across America.

Nearly 80% of these community hospitals are not-for-profits. That means they operate to provide essential public services — no shareholders, no private owners. Any money they make goes back into the facility and the community.

To keep their facilities and medical services up to date, most not-for-profit hospitals need millions of dollars. To get that kind of money, they need to borrow. Providing this money is a large but surprisingly little known part of Wall Street.  It is called the municipal bond market.

The municipal bond market, all $3.7 trillion of it, is where Wall Street meets Main Street. State and local governments, not-for-profits, and other public-service governmental authorities use this market to borrow money to build bridges, maintain roads, keep tap water flowing, toilets flushing, and a host of other public services we use every day and usually take for granted.

When a municipality, agency or hospital borrows, it sells bonds to investors. A bond is like when you go to the bank to get a mortgage. Just like you promise to repay the mortgage at a certain interest rate, a hospital promises to pay investors both their initial investment (principal) and interest (coupon).

Both investors and borrowers like the municipal bond market for several reasons, but the two main ones are that the municipal bond market is tax-exempt and it lends money for 30 years. Investors buying the bonds don’t pay taxes on the interest they receive. Because tax-exempt interest rates are usually lower than, say, the taxable interest rates that corporations borrow at, not-for-profits like your local community hospital get to borrow at lower rates, saving money that can be used to provide care, buy new technology, or to keep charges down. Savings can total in the millions of dollars.

The implications of this borrowing tax-status change are substantial. Big, well-known companies such as Microsoft or Apple have no problem issuing their taxable bonds to investors around the world. But a small community hospital? It doesn’t have that kind of size or name recognition to attract investors at interest rates that would be as low as the previous tax exempt rates.

With higher rates, potentially at less favorable terms and shorter repayment schedules, many hospitals might find themselves facing budget problems. Increased borrowing costs might mean having to increase charges for services or not having money for necessary medical equipment upgrades. Not only might patients end up paying more, but also it is equally possible insurance coverage, be it private, Medicare, or Medicaid, won’t reimburse for the higher charges. Patients might have to pay a lot more out-of-pocket.

So while others may think they are pocketing more money with the new individual tax rates, keep in mind the implications of other parts of the proposed tax changes.  They may cost you more than you’re saving.


Record Municipal Junk Bond for Hospital Set as Market Draws Cash–uWblrPu1rxFD2yp1LlH_UYlbHM5Cump1Id8VVkQHCiZfJSEYEwqDTDPbr5CB3UOmFeVhRVmQw4WKTIguHjOEAmd3gPw&_hsmi=28910945

Nonprofit healthcare borrowing picks up, systems issue $18 billion in bonds

Nonprofits issued only $16 billion in municipal bonds in 2013, a 40 percent drop from the $27 billion issued in 2012.

The Capital Conundrum

Tax-exempt hospital systems without fortress balance sheets and top quartile operating performance will be capital constrained in the future healthcare economy, even if tax-exempt debt continues be cheap and accessible. Stating the obvious: operating a hospital is a capital intensive activity. Historically, hospitals have required about $1 of invested capital to generate $1 of hospital revenue. As hospital systems contemplate changing their facility-based fee-for-service models into health enterprise models responsible for managing populations of patients and being at risk, capital will need to be deployed into new areas. Many of these new investments are impossible to fund with traditional tax-exempt debt, no matter how cheap.

To maintain existing facilities, hospitals need to fully fund annual depreciation, which industry-wide, averages about 6% of net patient revenues. This also means 6% of the average operating and EBITDA margins are consumed by capital expenditures. For stronger systems, capital expenditures typically exceed annual depreciation expense by 20 to 30%. In addition to traditional uses of capital to upgrade facilities, equipment, and technology, hospital systems transitioning to the new health care delivery models need capital to support risk-based population management systems. These investments may include building out physician networks, more comprehensive (and integrated) information technology systems, risk management infrastructures, capital reserves to take risk (similar to insurance reserves), post-acute care asset investments, and many other needs. Furthermore, as hospitals shift from fee-for-service to risk based revenues, a performance trough will occur that must also be accommodated. Significant declines in operating margins for several years will naturally occur as volumes decrease and population management development expenses escalate.

Funding these new capital requirements on top of traditional facilities-based investments requires financial performance strength (in our estimate 12% or better EBITDA margins), balance sheet strength (180+ days cash on hand), and scale (at least $2 billion in revenues, if not more). Financial performance strength is necessary, because many investments such as building physician networks and managing the infrastructure to support these networks is costly, with much of the cost borne on the income statement. Balance sheet strength is necessary, because funding population management infrastructure, including risk reserves, is not efficient or even possible by issuing tax-exempt debt. Funding must come from operating cash flow, cash on the balance sheet, or taxable debt, all negatively impacting overall credit strength. Scale is necessary both to reduce per unit delivery costs and to underwrite risk in an actuarially sound manner.

For less than top tier rated hospital systems, these capital demands create a capital conundrum: building both balance sheet strength in the form of increased days cash on hand and reduced leverage, while also spending capital that is not financeable with tax-exempt debt and very difficult without extraordinary operating margins.

To address this capital conundrum, hospital organizations are deploying a number of strategies. The most obvious, and reflective of the current high level of consolidation activity, is to merge with larger, better capitalized systems to achieve scale. These transactions come in many forms, including straight sales, membership substitutions, joint operating agreements, and so forth. Other less transformational strategies include formation of loose affiliations such as Allspire, Stratus, BJC Collaborative, Midwest Health Cooperative, and others. For some organizations intense focus on improving operating performance to generate significant incremental cash flow has been the primary strategy, often with a view to merger later in the cycle. Under any circumstance, doing nothing is not an option.

Whether sustaining long-term viability requires $2 billion in revenues or $20 billion in revenues, the hospital industry is undergoing unprecedented change that requires careful assessment of where and how capital is generated. It is unlikely that the traditional tax-exempt financing model can sustain this transformation. For that reason we expect to see the pace of conversion and inclusion of taxable organization models to accelerate. The Baylor/Tenet joint venture is reflective of that.

By Carsten Beith (Cain Brothers)

Compass and Dollars