Bank crisis touches hospital
In an example of the global banking crisis touching Vero, Wachovia Bank – which is in the process of being absorbed by Wells Fargo – has declined to renew most of the $43.8 million line of credit it had previously extended to Indian River Medical Center, leaving the hospital scrambling to figure out the best way to deal with bonds used for building and expansion dating back to the 1980s.
The medical center, which leases the building and property from the Indian River County Hospital District and is responsible for paying back the bonds issued by the taxing authority, is required to support the bonds with a line of credit.
“Each year, the medical center must get a letter of credit issued by a bank and in turn show that letter of credit to us (the Hospital District) to show that there is backing for those bonds,” said Ann Marie Suriano, the Executive Director for the Hospital District.
On October 1, the Wachovia line of credit will expire, and banking officials already have made it clear to the Indian River Medical Center that a line of credit for $28 million in bonds issued in 1985, 1988 and 1989 will not be renewed. The bank still is considering whether to offer a new line of credit for bonds issued in 1990 for $15.8 million.
In the current banking environment, replacing the Wachovia line with a credit line from another bank seems unlikely. “Not many banks are issuing letters of credit to hospitals these days,” said Suriano.
Fortunately, while approaches to dealing with this credit crunch seem certain to significantly increase the hospital’s cost of debt service, there does not appear to be any question about IRMC’s ability to deal with the debt itself.
Jeff Susi, Indian River Medical Center CEO, describes the current situation as a “liquidity crunch” which in a worst case scenario would see IRMC pay off all $44 million in bonds and still have “a little more than $15 million” in hand.
“We’re in a position where we can take out all of the debt and still be left with $15 million,” said Susi.
“Our operating performance would improve because of the elimination of interest expense. Taking out the debt reduces our expenses by well over $1 million a year. That improves our cash flow, and improves our operating performance.”
But Susi says there are a variety of other scenarios for dealing with the debt that will be considered by the hospital board in the weeks immediately ahead.
Here is the current situation, and some of the options.
The first part is the initial series of borrowing through the 1985, 1988 and 1989 series of bonds.
Today, these bonds total approximately $28 million, and they are backed by a letter of credit which Wachovia does not plan to renew.
When they expire, that will trigger repayment of those bonds from Guaranteed Investment Contracts – so-called GICs – an investment vehicle purchased through a 1996-1997 refunding borrowing in approximately the same amount as the 1985, 1988 and 1989 series of bonds.
“Those bonds would be paid from the Guaranteed Investment Contracts, and we would be left with the refunding borrowing of 96-97 of $28 million which we could elect to leave in place,” said Susi. “What that effectively does is move us from a variable rate debt – which historically has been very attractive, 2 percent plus or minus – to a fixed rate debt of 6 percent.”
So if the Indian River Medical Center chooses this approach, it still will be on the hook for $28 million in debt – but at 6 percent interest – and IRMC would still have $59 million in money in the bank and investments.
The second part of the equation is the 1990 bonds totaling $15.8 million. “If Wachovia decides not to renew the $15.8 million letter of credit, if they just want out of the credit market totally, then we would take $15.8 million out of our portfolio and pay that off,” said Susi. “We are supposed to know in the next two to three weeks on their decision.”
If IRMC paid off those bonds, that would bring the hospital’s cash and investment portfolio down from $59 million to $43.3 million.
But, notes Susi, there are a lot of other options for the hospital board to consider.
“Wachovia could come back and say, ‘We will renew the ($15.8 million) letter of credit, but it is going to be 300 basis points,’ and we could look at that and say, ‘No, we would prefer not to borrow at that cost.’
“We might take the 1990 series bonds, $15.8 million, buy them back, and reissue them. We’re actually looking at a couple of different structures. We could reissue them as fixed rate bonds, we could reissue them in longer maturities of 6 months or a year, or we could sit on them for up to 12 months and then reissue them. We don’t know what we are going to do, but there are options with that.”
But all those decisions are yet to be made.
The bottom line is IRMC is guaranteed of having at least $28 million of debt facility – from the 1996-1997 refund borrowing — available if it chooses to continue with it.
“We may or may not elect to pay it off,” says Susi. “And the optional $15.8 million is a question of will Wachovia offer it to us, and if they do, will we accept their terms? Those are going to be business decisions on the cost of capital versus the bottom line impact on the hospital.”
Notwithstanding the current angst over the financial markets, Susi says Indian River Medical Center is “very fortunate in two ways.
“Many hospitals are behind the eightball in terms of their facility needs. From the emergency room, to imaging to laboratory services, to critical care, and the operating room and the heart program, we are in excellent shape. We have a couple of things that we would like to do like expansion of surgical intensive care and post anesthesia care, but we can operate quite nicely and take care of patients with what we have now.
“We are very fortunate in terms of the shape of this facility.
“I just added it up the other day. In the past 10 years, we’ve invested about $117 million – so it has been a major upgrade in the facility. So that is one major strength.
“The other strength is that even with the stock market decline, we’re in a position where we can take out all of the debt and still be left with $15 million.
“I’ve always said we have been dependent on philanthropy for new programs and facilities. I don’t see that changing. I don’t see us fund-raising to replenish the endowment – rebuilding that back. I see us fundraising for facilities and new programs.
“If tomorrow it was decided that the best way to do prostate cancer or a heart valve or some GYN procedures were to have a da Vinci robot for $1.5 million, we would go look for a donor to do that. We would not be able to fund $1.5 million out of our replacement budget. But that would be a new program, a new service, and we have been fortunate to have a very generous community.
“One measure that I look at is our net assets. Over the past 10 years, because of this wonderful, generous community, our net assets have increased over the decade. The one line that makes the most sense is even after depreciation, our plant, property and equipment has gone from about $58 million to over $75 million.
“So we used to be well positioned to take care of our financial needs, but now we are well positioned to take care of patients”, said Susi. “That’s really what it is all about.”