A new program taking effect in March provides hospitals with a
new option to secure funds for financing acquisitions and
refinancing debt.
On February 5, 2013, the Office of Hospital Facilities published a
new rule that will enable qualifying hospitals to finance their
acquisitions and/or refinance their existing debt with FHA
insurance even if the hospitals do not have FHA-insured mortgages.
With this new rule, the Department of Housing and Urban
Development (HUD) has provided permanent regulatory codification of
its refinancing authority, increased the number of the
hospitals that are eligible to apply for the insurance, and
expanded the list of expenses that are eligible for refinancing.
For qualifying hospitals, the new rule represents a unique
opportunity that is further enhanced because it does not condition
availability on any pre-set expenditures of funds for construction
or rehabilitation. If construction or rehabilitation is
contemplated, however, the rule still is available for such
hospitals that successfully apply.
The new rule will take effect on March 7, 2013. Because the
rule significantly loosens the eligibility criteria for qualifying
for FHA Section 242 Hospital Mortgage Insurance Program, it is
expected that the many hospitals that currently are saddled with
high debt service payments will attempt to take advantage of the
opportunity afforded by the new rule. Effectively, borrowers who
qualify will have their debt converted to the equivalent of
"AA" or "AAA" rated debt, thereby lowering
their interest rates and reducing their borrowing cost. The
new rule amends the Section 242 regulations to permit refinancings
for hospitals that do not have FHA-insured mortgages in place and
does so without conditioning such refinancing on new construction
or renovation.
As is to be expected, the new rule is not designed to be an option
for all hospitals. Instead, the rule is designed to help those
hospitals that are essential for the communities in which they
operate but which are saddled with unexpectedly high interest rates
and do not have the opportunity to refinance in the current market
environment.
There are a number of restrictions on eligibility. Each proposed
borrower will be required to demonstrate that it is a hospital with
a high degree of financial strength. In general, a hospital will be
ineligible if it had an average debt service coverage ratio of less
than 1.25 to 1 in its three most recent audited years unless HUD
determines that the hospital achieved a financial turnaround
resulting in a debt service coverage ratio of at least 1.4 to 1 in
its most recent year. In cases of refinancing, the
hospital must have an aggregate operating margin of at least 0%
when calculated from the three most recent annual audits and must
have an average annual debt service coverage ratio of at least 1.4
to 1 during such time. If the borrower is refinancing pursuant to
Section 223(f), HUD will use projected debt service if the above
tests are not met by applying its estimate of the projected rate at
the time the mortgage is expected to close in lieu of the
historical rate. In such case, the hospital will be required
to demonstrate compliance with a required 1.4-to-1 coverage ratio
but HUD may permit the hospital to exclude one of the three prior
fiscal years from the test if one-time exceptional events
substantially altered the hospital's performance for the year
proposed to be omitted. In this case, the three-year performance
that will be based on the four most recent years with the unusual
year omitted.
In addition to satisfying the debt service coverage rates and
operating margin tests, the hospital may show it provides an
essential healthcare service to the community by submitting an
analysis quantifying how the community in which it operates would
suffer if the hospital were no longer in operation. Specifically,
the hospital would need to document that (a) the community would
suffer inadequate access to an essential service that the hospital
provides, (b) there are few alternative financing vehicles and (c)
three of the following seven criteria are met:
- the proposed refinancing would reduce the hospital's total operating expenses by at least .25 percent;
- the interest rate on the proposed refinancing would be at least .5 percentage points less than the interest rate on the debt to be refinanced;
- the interest rate on the debt that the hospital proposes to refinance has increased by at least 1% since January 1, 2008, or is likely to increase;
- the hospital's annual total debt service is in excess of 3.4% of total operating expenses;
- the hospital has experienced a withdrawal or expiration of its credit enhancement facility or the lender providing its credit enhancement facility has been or is about to be downgraded;
- the hospital is a party to bond covenants that are substantially more restrictive than the Section 242 mortgage covenants; and
- there are other circumstances that demonstrate the hospital's financial performance would be materially impaired by the refinancing.
Additional changes under the rule include new definitions
of "Capital Debt," "Soft Costs" and the like
which in context are designed to make clear that HUD has the
authority to finance and refinance those costs listed which are
enhanced under the new rule. Such costs include swap
termination expenses. The inclusion of swap termination payments
will undoubtedly be a godsend to those hospitals stuck with
underwater swaps in the wake of the financial meltdown.
The community need information that may be provided in the
hospital's application is designed to provide HUD with the
necessary information to enable it to select only those hospitals
where the need for 242 mortgage insurance is compelling. While the
insurance contemplated by the new rule is not likely to be
available for hospitals that are financially secure, it is a
significant opportunity for the remaining hospitals that
successfully avail themselves of the opportunities afforded by the
rule and that satisfy the compelling need test.
For further information visit Waller
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