DEBT PORTFOLIO MANAGEMENT

Debt Portfolio Management



Debt Portfolio Management

Introduction

Over the next decade, as market changes occur and health reform regulations emerge, the quantification of impacts and risks will be more important than ever for hospitals. Every hospital should assess the expected impact of health reform and market forces on an ongoing basis and develop appropriate response strategies. Preparedness for change by organizations at all credit levels is by itself a competitive advantage. The hospital must consider the following strategies: A. Using empirical market and financial data, accurately assess the hospital's current strategic and financial position, where it needs to go, and if it has the resources to get there. B. Through sound financial management do everything possible to preserve the strength of the hospital's credit position.Discussion

The challenge for many small hospitals is whether they have the scale and financial resources needed to secure a public credit rating. If they do, the next question is whether the public rating they secure is high enough to be helpful to their capital formation effort. A public rating usually is helpful, but it is not always necessary. Many of the strategies described throughout this guide involve the use of credit intermediaries, such as banks, the FHA, or other alternatives, which do not necessarily require a public rating for access to that financing alternative. Whether a hospital obtains a public rating or not, the basic principles behind a secure credit position apply to every organization. Understanding credit metrics and incorporating them into ongoing financial management efforts will improve any hospital's ability to approach a range of appropriate lenders from a position of relative strength. As such, the need for objective, strategic and financial planning is heightened for smaller organizations. Disciplined evaluation and study will enable the board and management to assess whether the available access to capital is strong enough to support the organization's strategic needs. Once the financial plan is established, continued rigor and discipline will be required to achieve the targeted levels of performance (Thomas, 2009).Evaluating the financing options

The capital markets have returned to a more normal level of functioning in 2010, allowing access to external debt by organizations at most credit levels. Transactions continue to get done across the credit spectrum, at times requiring different structuring and provisions, but smaller and lower-grade credits should always assume that they will experience a more arduous process. Tax-exempt fixed-rate bonds are currently the product of choice, as hospitals move risks related to variable-rate debt off the table, but various alternatives are available to health care borrowers. Bank lending capacity has increased. Market volatility remains high, and warrants close executive attention (Kaplan and Singh, 2009).

Financial OptionsSources of Local and State Support

Local and state support can significantly lower a hospital's cost of capital and contribute to capital funding. Smaller hospitals can benefit from pursuing all capital options, including philanthropic donations and local and state support for specific projects. Communities with small hospitals typically are highly invested in retaining their local access to health care and hospital-related jobs. Some municipalities and districts might be able to afford direct or indirect support of the hospital; given current fiscal constraints, others may ...