Evaluating and Managing Financial Risk

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1. The Issue. Historically, risk has been undervalued by both investors and borrowersCurrently, risk is overpriced in most marketsHow does a system address existing and prospective risk?IdentificationQuantificationEducationMonitoringReporting. Healthcare Finance Changed Significantly in

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Evaluating and Managing Financial Risk

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1. Evaluating and Managing Financial Risk March 2010

2. The Issue Historically, risk has been undervalued by both investors and borrowers Currently, risk is overpriced in most markets How does a system address existing and prospective risk? Identification Quantification Education Monitoring Reporting

3. Healthcare Finance Changed Significantly in 2008-2009

4. Summary of Current Market Conditions Fixed Rate Market Open to Investment Grade or better credits Market has been more receptive to BBB rated credits recently, with $380 million issued in recently at MMD + 180-200 bps Yields have dropped significantly in recent weeks Spreads have tightened Yield curve is steep, but credit curve is inverted Aa3/AA- credits spreads in range of MMD + 85-100 bps Variable Rate Market Rates below 0.50% Credit availability can be challenging New products available to highly-rated credits Swap Market Long term LIBOR swap rates still below Treasury Collateral posting pressure has eased Tax exempt swap rates still high relative to taxable

5. Current Rating Agency Perspective on Non-Profit Health Care Significant increase in rating downgrades and negative outlook changes Negative outlook on not-for-profit healthcare in general Credit markets tightening relative to pre-financial crisis Downturns in volumes, payor mix and profitability Reduced liquidity  Focus on impact of economic downturn on balance sheet Cash and investments Capital spending Pension funding levels  Strong, stable operations key to maintenance of ratings Market share Diversification of profitability Management and governance

6. Global Financial Risk Assessment A change in focus from minimizing cost of capital to risk management Put risk Tax risk Basis risk Credit risk Counterparty / Remarketing firm risk Debt and Swap Policy Board approved Updated Actively manage swap portfolio Monitor values / covenants Explore mitigation strategies Avoid over-reaction Know your debt and swap documents Push for as much cushion / flexibility as possible

7. Global Financial Risk Assessment (Continued) Keep Board informed of pending risks and initiatives to control them Review of staffing, service lines, vendor contracts, outsourcing, physician strategies, MIS capabilities, credit/collections policies, investment allocations Actively manage credit community relations Rating agencies – most important Credit enhancers Investors Carefully manage commercial banking relationships Diversify Obtain credit & keep dedicated but uncommitted line(s) available Seek high credit quality partners Preserve liquidity & strong financial results Investment policy Capital spending Bond issue reimbursement Continue to maximize returns and financial position

8. Global Financial Risk Assessment (Continued) Reevaluate capital plans Reduce/refine project scope? Change financing mode or timing? Enhanced governmental lobbying Create a health care initiative within the Federal economic recovery plan - Accelerate proposed healthcare reforms, expand Federal debt guaranty Restrict reimbursement cutbacks and Federal & state levels Conclusion: Tenets of a successfully managed organization Financial risk modeling and optimization Engaged governance Disciplined strategic planning Successful physician integration Robust information systems Fiscal prudence / financial flexibility Effective capital access strategy Strong external communication & disclosure practices

9. Capital Access Process

10. Key Decision Points for Aggregate Long-Term Debt Profile Threshold decisions in developing a long-term debt profile.

11. Comparison of Risks and Costs For Financing Alternatives

12. What is RADAR? RADAR is a process for Identifying Risk Evaluating Risk RADAR is a tool for Quantifying risk Measuring potential and probably outcomes Monte Carlo simulations “Scenario” analysis RADAR is an optimizer for Improving current risk / reward profile Incorporating new debt and swap structures into analyses Effect of changes in capital structure on financial metrics

13. What Is RADAR? RADAR = Risk Analytics and Dynamic Allocation of Resources RADAR is a comprehensive assessment of financial risk and opportunity performed by Ponder & Co., the nations leading not-for-profit healthcare independent financial advisor. It provides management and governance with the ability to see risks before they appear, and opportunities before they dissipate. RADAR optimizes financial assets, liabilities, and interest rate swaps to the efficient frontier, thereby maximizing margin and minimizing risk.

14. 13 Financial Risks in Example HOSPITAL’s Debt and Swap Portfolios

15. Aggregate Risk Assessment Flash Report

16. 15

17. 16

18. 17 Monitoring Key Risks Associated with Capital Structure

19. 18 High Risk Monitoring Key Risks Associated with Capital Structure

20. Capital Structure Risk Analytics and Monitoring

21. Risk Assessment for Covenant Compliance

22. Risk Assessment for Key Financial Ratios Current Capital Structure

23. Liquidity Metrics

24. Cash Flow Metrics

25. Profitability Metrics

26. Leverage Metrics

27. Optimization of Potential Bond Issue

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