Analysis of Long Term Alternatives for a City Hospital - Essay Example

Analysis of long term alternatives for a hospital Program characteristics: New York has the dubious distinction of being a great borrower.Not something to be proud about. This is the city run by politicians, public authorities and small interest groups in Albany, who reap the benefits from such activities. The catastrophic fall of the State-owned Urban Development Corporation (UDC) still haunts most New Yorkers. http://www.manhattan-institute.org/html/cr_5.htm The city hospitals are facing numerous external and internal challenges that contribute to their decline. This leads them to seek long-term debt alternatives to sustain their identity and operations. The role of Care enrollments, dip in Federal Medicare inpatient and outpatient reimbursements, and changes in Medicaid reimbursements are reasons for the steady decline in the financial performance of these hospitals. According to the "PwC" study, profit margins dropped from 4.40% in 1995 to 1.76% in 1997 and .55% in 1998. Declines were consistent across all categories of hospitals regardless of teaching status, size, or geographic location. In 1997, 26 hospitals reported net losses from operations. This number increased to 42 in 1998. http://www.state.nj.us/health/hcsa/acoh/trends.htm So, how do they get out of this trauma FHA-insured financing is perhaps the best solution to long term alternative loans. The debts are non-recourse, come with attractive fixed rates of interest and most importantly repayable in periodic installments running up to 40 years. This is one financial institution that can be trusted for its staying power. This paper takes a close look at the basic characteristics that influence long-term debt alternatives for hospitals. 1.0 Security: GNMA securities are much sought-after as they are backed by the United States Government. A mortgage backed security is an ideal long-term debt instrument. Mortgage banking institutions, or "issuers" as they are commonly referred to as, issue mortgaged-backed securities and sell them to investors. The returns from these sales are used to pay mortgage debts. 2.0 Percentage financing available: Though there is no fixed percentage of money financed, a striking feature with major money-lenders is that a majority of them are offering 100% home loans at near-market rates to conventional borrowers with good credit. This is a trend set to keep them in the hunt in the face of spiraling interest rates. 3.0 Risk: With such attractive schemes come hidden risks. A recent survey exposed the intricacies faced by these borrowers. Deprived of equity, they end up paying much more than their property is worth even with the slightest dip in property value. These debts come with high mortgage insurance leading to exorbitant monthly repayments. Bonds are highly volatile and can affect the price of debt security any time. Other factors that can have a direct influence on the face value of bonds are adverse taxes, legislative or political changes, and the financial condition of the "issuers". http://www.bankrate.com/brm/news/mtg/19990902.asp http://personal.fidelity.com/products/fixedincome/fitaxabletax.shtml 4.0 Terms of financing: It could be anywhere around 70% to 90% of the face value of the asset depending on the lender. Normally, private lenders prefer GNMA securities as they are Government-backed and ideal long-term debt instrument. Mortgage banking institutions, or "issuers" as they are commonly referred to as, issue mortgaged-backed securities and sell them to investors 5.0 Prepayment provisions: Even though there is no hard and fast rule as to repayment provisions, FHA-insured financing can go up to 40 years. Private money-lenders expect debt obligations such as bonds and notes which have maturities greater than one year to be considered for long-term debt and others such as T-bills and commercial papers for debts to a maximum of one year. 6.0 Required reserves Most established institutions pay up to 70% of the value. This requires the borrower to keep at least 30% of the face value as reserves. There are however private lenders who offer up to 100% of the face value in finance. A word of caution: judge your repayment capability before making the right decision. Long-term debt alternatives for hospitals: 1.0 Taxable bonds: Government owned bonds that are issued under strict conditions and approval of the state's voters. Long term bonds to finance Local Government Assistance Corporation (LGAC), and major Government offices like Thruway Authority, Job Development Authority, and Port Authority are taxable. 2. Tax exempt bonds: Municipal bond funds are tax exempted. A bond fund that invests in municipal bonds can generate more net interest income than a taxable bond fund with a higher stated yield. Municipal bond funds normally seek to earn income and pay dividends that are expected to be exempt from federal income tax. If a fund investor is resident in the state of issuance of the bonds held by the fund, interest dividends may also be free of state and local income taxes. Such interest dividends may be subject to federal and/or state alternative minimum taxes. Investing in municipal bond funds for the purpose of generating tax-exempt income may not be appropriate for investors in all tax brackets. Fund shareholders may also receive taxable distributions attributable to a fund's sale of municipal bonds. Fund redemptions, including exchanges, may result in a capital gain or loss for federal and/or state income tax purposes. Note: Interest dividends paid by municipal bond fund may be taxable under the Federal Alternative Tax (AMT) system if the bonds held by the fund are issued to cover the costs of housing projects, hospitals, certain types of airport expansion projects, and/or industrial parks. To find out if you might be subject to the AMT. http://personal.fidelity.com/products/fixedincome/fitaxabletax.shtml 3. FHA-insured mortgage (GNMA guarantee): Federal Housing Administration (FHA) insures mortgage debts for construction, rehabilitation, acquisition and refinancing of healthcare, senior housing and multifamily rental projects. GNMA is a wholly-owned government corporation within the Department of Housing and Urban Development ("HUD"). GNMA's statutory mission is to facilitate private investment in low to moderate income housing developments. GNMA mortgaged- backed securities must be insured by FHA. FHA insures these securities up to 90% of the debt money. GNMA securities are widely traded in secondary markets below or above face value depending on the current market interest rate. http://caselaw.lp.findlaw.com/cgi-bin/getcase.plcourt=dc&navby=case&no=955243a The Quail Run Transaction DRG Funding Corp ("DRG"), was a mortgage banking institution DRG was a large-scale issuer of loans and securities in the GNMA program. In 1988 DRG defaulted under its guaranty agreements with GNMA, and its mortgages and securities became the responsibility of GNMA. GNMA sought bids from other approved issuers for a sub-servicing contract for the DRG portfolio. York Associates submitted a bid and won the contract. It entered into a Sub- Contract Servicing Agreement with GNMA in September 1988. The Agreement gave York Associates servicing responsibilities for the DRG portfolio and custody of all of DRG Funding Corp's loan records. http://caselaw.lp.findlaw.com/cgi-bin/getcase.plcourt=dc&navby=case&no=955243a Bibliography A study by PricewaterhouseCoopers ("PwC") commissioned by the New Jersey Health Care Facilities Financing Authority ("NJHCFFA") entitled "Assessment of the Fiscal Condition of New Jersey's Acute Care Hospitals (http://www.state.nj.us/health/hcsa/acoh/trends.htm) http://caselaw.lp.findlaw.com/cgi-bin/getcase.plcourt=dc&navby=case&no=955243a http://personal.fidelity.com/products/fixedincome/fitaxabletax.shtml Read More