Debt Financing for CA Clinics: Weighing the Options

Presented byTony Skapinsky

Project Consultant, Capital LinkNovember 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 What’s Best for Your Center Debt Financing and Capital Campaigns Q&A

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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 clinic’s 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 C’s: Capacity (management), Credit, Collateral, Competition/Customers, and Cash-flow coverage

Does the project make sense? Lender’s 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 Considerations:Debt 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 don’t 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 Sources:Private Sector Debt & Credit Enhancement

Banks Pros & Cons

CPCA Capital Loan Programs up to $600,000 (limited availability) @ 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 Sources:Federal 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 Sources:State-

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 > $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 Sources:State- 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

Leverage Lender

Investment Fund

Managing EntityCosts,

Reserves

Servicing

CDE

Health Center

QEI NMTC

Equity Investor

LoanLoan

paymentsTax Credits

Investment

Loan Payments

New Building

NMTC

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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 What’s 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

Weighing the Options

OPTIONSCPCA Loan Programs

Banks USDA Help II (CHFFA)

Loan Size

Up to $600,000

up to $5.0 million

No maximum

Up to $500,000

Max. Term

5 years 7 to 10 years

40 years 15 years

Interest Rate

3% 5/10Treasury plus 2- 4.% w/resets

4.5% + 3%

Fees 1% 1.0 to 2.0% plus closing costs

- 1.25%

Weighing the Options

OPTIONSTax-Exempt

Bonds (Private

Placement)

Tax-Exempt Bonds (Public

Offering)

IHCP(T/E Bonds)

Healthy California(NMTC)

Loan Size

$1-$5 million $5 - $20+ million

$1-$7 million

$1.5-$3 million

Max. Term

15-20 Years 30 years 20 years 25 years

Interest Rate

Fixed T/E rates

4 to 5+% fixed

2-3% below conventional

6% fixed; Const. loans @ 7%

Fees 2% 3% of total P&I plus 3-5% for closing costs

2% (rough est.)

1.5% plus closing costs

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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” doesn’t 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 can’t avoid them!)

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Debt Financing and Capital Link:Services 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 Link:Services 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 SlezakProject ConsultantsCapital Link

979 Osos Street, Suite B3San Luis Obispo, CA 93401(805) 544-2355 (or -2345)tskapinsky@caplink.org

sslezak@caplink.org