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Capital-Project Logjam Loosens...but SlowlyDebt markets ease, new financing more available as economy stabilizes
Teri Fontenot now knows that patience is both virtuous and prudent. Six months into construction of a $350 million replacement hospital, the CEO of the Woman's Hospital of Baton Rouge, La., put the project on hold to wait out the worst of last year's banking collapse.
"We started construction in June of 2008 using our own equity and had planned to go to the bond market in late '08 or early '09," Fontenot says. But when interest rates soared to 8.5 percent, adding $6 million in annual interest payments over initial projections, hospital officials decided to wait and see.
During the next eight months they also scaled back the project, eliminating excess capacity and finding efficiencies that trimmed $50 million from the cost. They now plan to restart the project with a bond issue in early 2010. As of now, it appears rates may be even lower than original estimates for the project, she says.
The easing bond market, combined with stock market growth, is slowly melting a 12-month capital-project freeze caused by the turmoil in the banking industry and sharp losses in investment income, says Richard Clarke, president and CEO of the Healthcare Financial Management Association.
Last winter, HFMA's Healthcare Pulse Report showed that 78 percent of hospitals were reducing capital expenditures. "That logjam has started to unwind," Clarke says, as hospitals address long-delayed construction, equipment and maintenance needs.
Many hospital executives remain reluctant to add debt until they're confident that their investment income is stabilizing, but "there's a positive appetite" in the market for tax-exempt bond debt, Clarke says. As of mid-October, interest rates had dropped to somewhere between 5.5 and 6 percent for A-rated bonds. Those rates are still high from a historical perspective, he adds, and available only to the hospitals with "reasonably good credit."
For hospitals with weaker credit or fewer resources, new financing options have developed over the past year. The U.S. Department of Housing and Urban Development eased some restrictions on its federally backed mortgage-insurance program. Legislation reinstated some tax advantages that provide a greater financial incentive for banks to purchase tax-exempt bonds. And Congress gave the Federal Home Loan Banks the authority to provide credit enhancements to tax-exempt projects that qualify as a community improvement—a benefit that traditionally has been restricted to housing loans.
These changes have been especially helpful for facilities that otherwise would have no access to debt, says Charles Samuels, who represents the National Association of Health and Educational Facilities Financing Authorities.
Fontenot's advice to hospital executives who are contemplating capital expenses: patience and sharp pencils.
"I would suggest that they review plans in light of the new environment," she says. "We're being much more conservative, patient and more methodical."
This article 1st appeared in the November 2009 issue of HHN Magazine.
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