A healthcare first: hospital has structured loan guaranteed
Guaranteed loan for Sint Franciscus hospital is a litmus test for the sector
Sint Franciscus Gasthuis (SFG) is a Rotterdam hospital that is financing a major renovation with a EUR 50 million loan.
Zanders assisted SFG in this complex process. It was complex because of the difficult economic climate, because of legislation and, last but not least, because of the use of a structured product new to the healthcare sector: a risky roll-over loan combined with risk-curtailing derivatives. But the loan will be guaranteed by the Healthcare Sector Guarantee Fund, or WfZ. This really is something new.
Hospital care in the Netherlands is undergoing significant changes. Through all kinds of market incentives, the government is stimulating a transition from a budget-driven system to a system guided by market forces. The patient – if he or she is lucky enough to be mobile, outspoken and well-informed – will often shop around for healthcare services. SFG is a strong contender amidst this changing landscape.
“Thinking in terms of cash flows and multiyear paths are new roles for a hospital. Each hospital needs to have a treasurer, preferably in combination with a Treasury Committee”
But accommodation is an important matter that requires attention in order to remain successful in the years ahead. Over the coming five years SFG will be thoroughly refurbished. The wards and part of the outpatients department will be renovated. The alterations will provide patient safety, a welcoming environment as well as innovation, privacy and greater comfort.
To fund the renovation the hospital went out into the capital market with a solid business case. “We had an ambitious requirement,” says finance & control manager, Gerard van Loon. “During the credit crisis we wanted a loan that gave us certainty as regards interest rates. The loan did not need to commence until one or two years after closure of the transaction.
We wanted to do this using a guarantee issued by the Healthcare Sector Guarantee Fund. Preferably we also wanted to do it in a way that allows us to offload the temporary liquidity premiums in the interim.” All the banks that Van Loon approached came up with a different solution. “This made it impossible to compare their offers with each other. We were also offered products like roll-overs and swaps that we found it difficult to assess on their merits.
Although we understood the general intention, we were unable properly to weigh up the legal implications and the financial risks. That is why we decided to engage Zanders as an external expert in this project.”
A specialized job
Zanders has ample experience of financing in the healthcare sector. “It’s specialized work,” stresses Zanders senior consultant Hendrik Pons. “The healthcare sector is dynamic. Legislation is continually being amended. As an adviser you need to be on top of what is going on.”
Van Loon agrees: “That’s exactly right. You must also consider what interest rates will do in the old system and in the new system. What might be bad under the budget system with interest-rate normalization might be good in the future and vice versa. External consultants must understand exactly how this works.”
SFG found itselfentering a new world. Until recently hospitals had no interest rate risks. The interest was reimbursed out of the normalization. The reimbursement will be lower in the new situation. Pons says: “You need to know for certain that you will be able to pay the future interest rates on the property.
The interest rate risk requires a good business case and attention to a multi-year liquidity forecast just like an analysis of the existing loans and the capital market. If your case is good, the bank’s confidence will be many times greater.”
One of the banks offered SFG financing consisting of a roll-over loan combined with derivatives. A roll-over is a loan for the medium term with an interest rate adjustable periodically to a percentage equal to the prevailing market rate. The interest rate risk that this causes is then hedged with the derivatives, in this instance a swap with separate documentation. In principle the Healthcare Sector Guarantee Fund wanted to guarantee only the roll-over loan.
After all, the use of derivatives could mean that fund would not get 100% of what it would normally get if SFG were to default. “Our difficult case was in fact a litmus test that showed whether the Healthcare Sector Guarantee Fund would come on board with constructions like this,” says Van Loon. For that reason we cooperated closely from day one with the account manager and with the board of WfZ.”
The fund has now guaranteed the full EUR 50 million. “Good documentation is crucial in a scenario that includes roll-overs with derivatives,” says Pons. “The structure now agreed includes a swap and a roll-over loan in a single product. Moreover, the hospital can benefit from a lower liquidity spread, should it be necessary. The product is well structured and was offered in a single document. That is why WfZ regards it as a single, guaranteeable loan.”
Van Loon adds: “An important point for us was that Zanders was able to give immediate advice at the crucial moment when we had to decide whether a normal market price was being offered at a time when there was no direct pressure from competition.”
Treasury is essential
The breathtaking pace of change in the healthcare sector makes it crucial for hospitals to have a good picture of their cash flows and to keep their finger on the pulse all the time. “Thinking in terms of cash flows and multi-year paths are new roles for a hospital,” says Van Loon. “Each hospital needs to have a treasurer, preferably in combination with a Treasury Committee.”
SFG now has new treasury rules that have been approved by the regulatory authority. “We will start with a Treasury Committee staffed by hospital people. Zanders will be a permanent adviser to the committee.”
Van Loon speaks glowingly about the cooperation with Zanders. “The Zanders people are experts and have a good reputation with WfZ and with the banks. What I personally found particularly good was that they did not seek to take charge ofeverything. Zanders supported me in matters where I said it was necessary. They left me at the helm, which optimized our learning process within SFG. I remained the chief spokesperson in talks with the banks.
Hendrik assisted me only at the decisive moments. This was very important in relation to the banks and Guarantee Fund. You have to be a fully fledged interlocutor for them. That is what the fund and the banks expect of you. All in all we achieved a good result. We are satisfied with the process and we have learned a lot.”