Debt Financing for CA Clinics: Weighing the Options

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Debt Financing for CA Clinics Weighing the
Options

• Presented by
• Tony Skapinsky
• Project Consultant, Capital Link
• November 2, 2006

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Agenda

• Role of Debt Financing in Capital Projects
• Lender Considerations
• Working with Lenders
• Overview of Debt Funding Sources
• Deciding Whats Best for Your Center
• Debt Financing and Capital Campaigns
• QA

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Role of Debt Financing in Capital Projects

• Most health center capital projects funded with a
  combination of equity and debt
• Debt extends a clinics ability to move ahead
  with a project in the near term and pay for it
  over its useful life
• Debt is only a feasible option if you can prove
  to a lender you can pay it back!
• Sources of Funds must equal Uses of Funds

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Lender Considerations Creditworthiness

• Lenders want to make a loan assuming that it can
  be paid back (w/ interest)
• 5 Cs Capacity (management), Credit, Collateral,
  Competition/Customers, and Cash-flow coverage
• Does the project make sense?
• Lenders less concerned about mission

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Lender Considerations(Historical Projected
Financial Ratios)

• Financial Performance
• Margins Revenue Growth Revenue Sources
• Financial Condition
• Current Ratio Days Cash Leverage
• A/R Days A/P Days
• Debt Capacity

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Lender ConsiderationsDebt Capacity

• Debt Capacity depends on
• Consistent and/or improving financial performance
  over time
• Adequate cash flow to support debt
• Debt Service Coverage Ratio (DSCR) Change in
  Net Assets Depreciation Interest Expense /
  Interest Expense Current Maturities LTD
• Typical DSCR Requirement 1.25

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Working with Lenders

• Put your best foot forward
• A well-crafted business plan goes a long way
  toward getting to yes
• Make the banks compete for your business!
• Negotiate terms and covenants
• Make sure you understand the covenant
  requirements
• Test them against your worst case projections
• You dont have a deal until you have a commitment
  letter
• Read your loan documents and make sure you
  understand them!

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Debt Funding SourcesPrivate Sector Debt
Credit Enhancement

• Banks
• Pros Cons
• CPCA Capital Loan Programs
• up to 600,000 (limited availability)
• _at_ 3 for 5 yrs.
• Community Development Finance Institutions
  (www.cdfifund.gov)
• NCB Impact Capital
• Rural Community Assistance Corp.
• Lenders for Community Development
• Non-Profit Finance Fund

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Debt Funding SourcesFederal Debt Credit
Enhancement

• USDA
• Direct loans, loan guarantees, and grant programs
  
• Communities of 20,000 population or less eligible
• Loans as low as 4.5
• Terms as long as 40 years
• Guarantees as much as 90
• HRSA/BPHC Loan Guarantee Program
• 80 guarantee on loans by non-federal lenders
  (cannot be used with tax-exempt bonds)

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Debt Funding SourcesState-Based Debt Credit
Enhancement

• Tax-exempt bonds through CHFFA
• Minimum size 5 million for standalone
  financings
• Possibility of pools for multiple borrowers with
  minimum needs of 500,000
• 1-5 million individual also possible
• Tax-Exempt Equipment Lease Program for equipment
  financings gt 500,000
• Other Issuers
• Issuances through California Communities,
  Association of Bay Area Governments, and other
  Joint Powers Authorities or Municipal Authority

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Debt Funding SourcesState- Based Debt Credit
Enhancement

• Cal-Mortgage Program Credit Enhancement
• Mainly used in conjunction with tax-exempt bonds
• Help II Loan Program (CHFFA)
• 25,000 - 500,000
• 3 fixed rates amortizations up to 15 yrs
• Total Revenues must be less than 20 million

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Investment in a Healthy California Program (IHCP)

• Tax-exempt Bond Issue
• WellPoint Inc.s 200 million investment
  portfolio to include investments in California
  Clinics
• For Low-Income Urban and Rural Underserved
  Communities
• Financing from 1-7 million
• Highly competitive interest rates
• Conduit Issuer is California Communities

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New Markets Tax Credits (NMTC)

• Program set up to bring in private capital to
  low-income communities
• Administered by Treasury's Community Development
  Financial Institutions (CDFI) Fund.
• Program authorized to allocate to CDEs the
  authority to issue to their investors up to the
  aggregate amount of 16 billion in equity
• In four rounds to date, the CDFI Fund has made
  233 awards totaling 12.1 billion in tax credit
  authority.

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NMTC Leveraged Transaction

• Combines debt and equity
• Reduces cost to borrower
• Potential for substantial debt forgiveness, soft
  second mortgages or other benefits
• Emerging as primary NMTC structure

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NMTC
Leverage Lender
Equity Investor
Loan payments
Investment
Loan
Tax Credits
Investment Fund
QEI
NMTC
Servicing
Managing Entity
CDE
Costs, Reserves
Loan
Payments
Health Center
New Building
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Debt Funding Sources Healthy California (NMTC)

• Collaborative effort of NCB Impact Capital,
  Impact Community Capital, CPCA Ventures and CCI
• Creates long-term, low interest, fixed rate
  financing for CA clinics
• Began in 2005
• Limited availability

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Healthy California Overview

• 20 million pool
• Loan Terms and Conditions
• Loan Size 1.5 - 3 million
• Interest Rate 6 fixed (permanent loans) 7
  fixed (construction loans)
• Term Amortization up to 25 years
• Up to 90 Loan-to-Value Ratio
• Facility must be located in NMTC-eligible areas
• May require establishment of Special Purpose
  Entity (SPE) to hold real estate

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Other NMTC Options

• NMTC structured deals can offer very favorable
  terms outside of existing programs such as
  Healthy California
• In the most recent funding round (2006), 19
  organizations that serve California were awarded
  a total of 1.44 billion in tax credits.
• For more information, please visit the following
  website www.cdfifund.gov and search on NMTC

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Deciding Whats Best for Your Center Factors to
Consider

• Location/Eligibility
• Urban or Rural?
• 330 or not?
• NMTC or Empowerment Zone-eligible or not?
• Size of Loan
• Interest rate and all-in rate
• Credit Strength/Need for Credit Enhancement
• Spotty financial performance?
• Much larger loan than clinic could have supported
  historically?
• Loan-to-Value issues?
• Relative need for long-term vs. shorter term
  financing and/or fixed vs. variable
• Interface with capital campaign

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Weighing the Options
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Weighing the Options
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Special Issues Debt Financing and Capital
Campaigns

• Timing is critical!
• Expenses must be matched with cash resources
• Multi-year campaigns can create challenges
• Trust me doesnt work well with banks!
• May be able to obtain bridge financing to
  cash-flow multi-year campaigns
• Negotiate equity in first provisions
• Watch out for no call provisions and/or
  prepayment penalties (sometimes you cant avoid
  them!)

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Debt Financing and Capital LinkServices
Supported by CCI

• Preliminary Project Planning
• Preliminary Feasibility Analysis
• Financial strengths and weaknesses, debt capacity
  analysis
• Capital Project Work Plan
• On-site visit to map necessary steps to
  completing a capital project
• Process, TA resources, Timeline and Budget
• Provided by Capital Link or Capital Incubator

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Debt Financing Capital LinkServices available
on fee basis (continued)

• Market Assessment
• Space and Program Planning
• Lease vs. Buy Analysis
• Federal Appropriation Grants Assistance
• Financial Projections and Business Plans
• Financing Assistance
• Analysis of Debt Options Lender RFPs
• Lender Negotiations/Loan Closings
• Loan Guarantee Applications

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Contacting Capital Link

• In California
• Tony Skapinsky Steven Slezak
• Project Consultants
• Capital Link
• 979 Osos Street, Suite B3
• San Luis Obispo, CA 93401
• [phone] (or -2345)
• tskapinsky_at_caplink.org
• sslezak_at_caplink.org