Financing Facilities in Today's Market

We are all painfully aware of the current difficulty in the national economy. Despite a recent upturn, the stock market is still down more than one third from its peak. The financial infrastructure of the nation has been redefined, with power house investment banks such as Goldman Sachs and Morgan Stanley seeking the protection of commercial bank status, most of the largest commercial banks falling under the control of the Fed, and the nation’s largest insurance company taken over by the government. National and international manufacturing firms, such as our major automakers, may be the next entities to come under government control. With the changes in our economic landscape, where does that leave us, and the financing of new ambulatory surgery centers?

These fundamental economic shifts have translated into significant changes in the way the largest ASC lenders do business. Three years ago, Citicapital, MarCap and CIT were the three primary lenders to our facilities. Both Citi and MarCap have been sold, and it is not clear at this time how actively their successor entities will be lending to our industry. CIT is no longer making new loans to ASCs. Senior executives from these three industry lenders migrated to new entities such as Siemans and Wells Fargo, which will hopefully become new mainstay lenders for the industry. Local lenders continue to be an option albeit more difficult to work with due to their limited knowledge of our business.

The result of these changes in both the national economy and the industry lending landscape has been fundamental changes in lending terms. A typical new ASC requires equipment costing $1.2 to $1.5 million, tenant improvements costing $2.0 to $2.5 million and working capital of $800,000 to $1 million. Several years ago, a start-up ASC could finance their capital needs with 20 percent to 25 percent equity. Interest rates would typically be 7.5 percent to 8 percent for a fixed rate five year loan. Limited or no guarantees were required and loan covenants were minimal.

These terms have changed dramatically. Presently a new ASC requires 30 percent to 33 percent equity, an increase of $700,000 in equity for a transaction requiring $6 million in total capital. Interest rates have not changed significantly as base rates are actually lower, but this has been offset by increased spreads to the lenders. Guarantees have become mandatory, with new loans typically requiring 100 percent to 125 percent guarantees with a burn-off after two years if 1.25 times EBITDA coverage is achieved. Loan covenants typically include minimum net worth and debt service coverage as well as minimum cash positions.

Clearly the landscape has changed in favor of the lenders. Fortunately, well structured transactions with solid sponsors still attract several alternative financing sources allowing the borrower some negotiating leverage. Times are tough, but the healthcare industry is one of the few areas where lenders are still active. Here at Regent, we are still completing those well-structured transactions and proving that as leaders in the industry, we are able to find a solution no matter what the condition of the market may be.
 

Michael Karnes
Regent Surgical Health
P. 708.492.0531
F. 708.731.5134