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Direct Bank Placements for Hospitals CFO Forum September 28, 2012 Pierre Bogacz HFA Partners, LLC PowerPoint Presentation
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Direct Bank Placements for Hospitals CFO Forum September 28, 2012 Pierre Bogacz HFA Partners, LLC. What Is a Direct Placement?. A bank direct placement or direct purchase (DP) is a bond issue sold in a private placement (limited offering) to a single bondholder, typically a commercial lender.

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Direct Bank Placements for Hospitals

CFO ForumSeptember 28, 2012

Pierre BogaczHFA Partners, LLC

what is a direct placement
What Is a Direct Placement?
  • A bank direct placement or direct purchase (DP) is a bond issue sold in a private placement (limited offering) to a single bondholder, typically a commercial lender.
  • Limited offering means restrictions on resale.
  • Bank holds the bonds to maturity.
  • Similar in other respects to publicly-sold bonds:
    • Senior debt
    • Tax-exempt or taxable
    • New money or refunding
    • Fixed or variable rate.
direct placement trends
Direct Placement Trends
  • Direct placements peaked in 2011 and are still in favor for new money or refundings, including partial refundings.
benefits of direct placements
Benefits of Direct Placements
  • Low coupon. Banks can price direct placements more aggressively than in the public markets, which translates into lower coupons. This is due to the bank having access to better security (treasury and deposit accounts) and better information (local market knowledge, prior history with borrower) than the public markets and additional fee business.
  • No middleman. Single investor status eliminates the need to place the bonds with multiple bondholders, which cuts costs of issuance. The traditional underwriting process is bypassed and even when a financial advisor is used, fees are a fraction of traditional underwriting fees (the single largest component of COI).
  • Less disclosure. Unlike with public offerings, private placements do not require an Appendix A. This reduces legal fees and time to closing. Banks are considered accredited investors who can do their homework and do not need an extensive narrative and background on the borrower.
  • No ratings. Banks do not require direct placements to be rated, which eliminates the need for rating agency presentations and reduces costs of issuance. In the public bond markets, unrated issues carry a much higher coupon than rated issues.
  • No DSRF. Bank facilities do not require a debt service reserve fund, even if they do not have deposit accounts with right of offset. Absence of DSRF eliminates negative arbitrage and helps maintain unrestricted cash balances and DCOH. Until recently (mid-2012), a DSRF was required in most hospital bond issues sold to the public in the “BBB” category.
limitations
Limitations
  • Short maturities. Most placements do not go out more than 10 years with a 20 or 25-year amortization, depending on credit quality and the strength of the bank relationship. Shorter maturities limit the hospital’s ability to refund some public offerings or bond for long-lived assets (like bricks and mortar) unless a balloon is included, which creates renewal/refinancing risk. Recent trends point to maturities getting shorter for placements.
  • Size. Placements are not sold to multiple investors like public offerings. For most banks, $60 million to $80 million is the upper limit, depending on the bank’s single-credit concentration limits and the hospital’s credit.
  • Additional business. Banks want the whole relationship and placements are often used to buy into/retain fee business, including: treasury, cash management, p-cards, and deposit and trust accounts. This can sometime reduce the hospital’s flexibility in selecting “best of class” vendors for these other products.
  • Tax risk. Placements contain language that allows for rate adjustments –or even puts-- in the event of changes in the tax code. In today’s low interest rate environment, the practical consequences are limited, but this risk needs to be taken into consideration.
  • MAC language. Material adverse change language is an out for the bank to call the bonds if a change materially affects the business, financial condition, or operations of the borrower. Publicly sold, fixed-rate bonds do not have MAC language. Too broad language may be equivalent to giving the bank an unconditional put and should be avoided or it may lead to the placement being classified by auditors as short-term debt.
direct placement case study
Direct Placement Case Study
  • Acute care hospital system rated BBB+.
  • DP to refinance a $30 million bond issue prior to its expiration in 2013.
  • Key RFP criteria:
    • Minimum final maturity of 10 years
    • Variable rate tax-exempt coupon (existing pay-fixed swap already in place)
  • RFP sent to 9 lenders qualified based on experience with direct placements and/or prior proposals.
  • 8 banks proposed, 1 declined.
  • 4 banks proposed less than 10 years and were eliminated.
  • Final bank was selected based on lowest all-in pricing and proposed terms consistent with existing Obligated Group terms.
  • Terms were extensively negotiated.
  • Start to finish: approximately 90 days (including RFP).
best practices in negotiating bank placements
Best Practices in Negotiating Bank Placements
  • Know the market. Some banks will go out longer than others with less restrictive terms. Others are uninterested in direct placements, regardless of terms. Many financial advisors have the prerequisite experience to guide the process when bond underwriters don’t.
  • Conduct a competitive process. Terms vary significantly between lenders, geography, bank “footprint”, and the current lending environment. In the absence of a competitive process, it’s very difficult for the hospital to ascertain if terms are optimal. A request for proposal process is usually the best way to find out.
  • Ask what you want. The biggest mistake is to not ask for a specific minimum final maturity. If this requirement is not clearly identified on the front end, the proposals will most likely fall short of what the hospital is looking for.
  • Address key terms early. Placement terms can be heavily negotiated and should be addressed early, preferably starting with the RFP or selection process. Banks have an incentive to postpone spelling out requirements for additional business for as long as possible, which can put the hospital at a serious disadvantage as time runs out.
  • Research:
    • What Hospital CFOs Need to Know About Bank Direct Placements (HFMA Strategic Financial Planning Fall 2011),
    • The Pros and Cons of Bank Direct Placements (www.hfapartners.com/articles September 2011).
contacts
Contacts

Pierre Bogacz

HFA Partners, LLC

550 N. Reo Street, Suite 300

Tampa, Florida 33609

(813) 365-3524 direct

(727) 244-2600

www.hfapartners.com

Registered Municipal Advisors, MSRB

disclaimer
Disclaimer

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