Accessing Financing in a Frozen Capital Market

Friday, October, 9, 2009 from 8:00 – 8:50

Session Summary

Perspectives from three healthcare specialists on the state of the credit market and how to access needed funds for new and existing oncology projects. 

We will discuss reasons for the lending slow down and tightened credit standards and share their insights into the often hard to understand finance industry.

Panelists

Peter S. MyhreSenior Vice PresidentWells Fargo Equipment Finance, Inc.Healthcare Financial Services Division

Kerwin BrandtPresident and Chief Executive OfficerAccelitech

Craig D. Frances, M.D.Managing DirectorSummit Partners

CURRENT STATE OF THE CREDIT MARKETS

Peter S. Myhre

HISTORICAL CONTEXTBalance Sheet and Income Statement measurements for hospitals have been in decline since 2005

Operating PerformanceMedian operating margin declined for the third consecutive year

Source: Moody’s U.S. Public Finance – Not-for-Profit Healthcare Medians for Fiscal Year 2008

Operating Cash Flows

• Operating cash flows also declined– From 9.7% in 2005 to 8.4% in 2008

• Salary & benefits continue to be the largest expense for not-for profit hospitals (50%)

Source: Moody’s U.S. Public Finance – Not-for-Profit Healthcare Medians for Fiscal Year 2008

Median Cash on HandFirst drop in 5 years

Source: Moody’s U.S. Public Finance – Not-for-Profit Healthcare Medians for Fiscal Year 2008

Capital spending steadily increased through 2008… and increasingly supported by debt

Median level of capital spending for 2008 was $37MM ↑8% from 2007*Reasons• Low cost of capital• Facility improvements:

equipment and facilities• Expanding to meet

growing population• Investments in

technology

Source: *Moody’s U.S. Public Finance – Not-for-Profit Healthcare Medians for Fiscal Year 2008; **HFMA

WHAT’S HAPPENING NOWCapital markets collapse and deep recession has had a material impact on the traditionally resilient healthcare industry – unseen since the Great Depression

Slow down in new projects

• Investments in medical equipment are down 54% Q2 ‘09*• Nearly 50% of hospital CFOs report capital projects have

been cancelled or are currently on hold**• Comment from major healthcare equipment

manufacturer: “new equipment sales are off 60%”

*monitorydaily.com

**AHA Report on the Capital Crisis: Impact on Hospitals, January 2009

The Perfect Storm: Demand & Access

• Uncertainty in how healthcare reform will affect providers

• Tax exempt bond market collapse

• Tightened credit standards

• Reduction in assets available for equity investment by hospitals, physicians and developers

Hospitals are key driver of capital purchases and new project development

• Credit market dislocation has made it difficult for non-investment grade hospitals to borrow funds and the cost of borrowing has increased for investment grade hospitals

• Significant drop-off in non-operating income due to investment losses, required pension accruals and tax-exempt bond related charges

• Operating income pressure from lower utilization and increase in patient bad debt

Tightening credit standards

Lenders have taken significant losses, delinquencies are increasing, more difficult for finance companies to raise capital and a reduction in firms lending money

•Healthcare reform impact– borrowers and projects need to be stronger•Bigger commitment from the borrower – helps ensure owners and partners are motivated to make a project successful•Stronger back-stop in the event a project is unsuccessful– equity investment, guarantees and other forms of collateral

Loan Charge Offs

Source: FDIC Statistics on Depository Institutions, loan charge offs net of recoveries

Commercial and Industrial Loan Activity

Source: FDIC Statistics on Depository Institutions

Outlook

Very good as the economy improves and credit markets recover, optimism returns and pent up demand is satisfied; how quickly this occurs is uncertain and the wild card–healthcare reform– could be played shortly

CONSIDERATIONS FOR YOUNG ORGANIZATIONS

Kerwin Brandt

Background Overview

• Located in Chicago - nationally focused• SRS & Cancer focused• Vendor neutral• Full service – Legal, Financial and Clinical• Proprietary “Accelitech Model” Structured Financing• Privately-held and funded

Credit Market Impacting All

• Hospital Based Programs and Free-standing Centers both impacted by credit market turmoil

• 88% of surveyed hospitals are experiencing increased challenges accessing capital (AHA Survey)• Philanthropy Decreasing, Tax Exempt Bond Market

Tightening, Borrowed Money Restrictions (Bond Covenants), Reserves Declining

• Limited Capital for growth and investment• Quantity of Lenders providing funding for equipment based

projects significantly reduced

Keys to Obtaining Financing

• Business Plan demonstrating positive return and cash flow• Analysis of market, volume, and reimbursement• Establish confidence in competent billing, administration and

marketing support• Proven Record (or working with someone who has)• Solid Structure – Hospital Based program helps• Structured Equity Support – must bring adequate equity from key

players

Must demonstrate mitigation of transaction risk

Hospital FreeBased Standing Mitigating Factors

Right Market Neutral Neutral Solid Business Plan

Volume Prove Up Neutral Neutral Solid Business Plan

Reimbursement Risk Containment + - Structural Mitigation - Confidence in Billing/Collection + - Structural Mitigation - Comfort in LT Reimbursement Rates + - Structural Mitigation

Confidence in Administration +/- + Structural Mitigation

Marketing Support Neutral Neutral Structural Mitigation

Credit Risk of End Provider + - Structural Mitigation

Capital into Venture Neutral Neutral Adequate Equity Support

Proven Record of Success

Phased Approach Drives Transactions Through the Process & Mitigates Risk

Business Planning

Partnership Creation

Deployment

Optimization

90 Day Letter of Intent

• Business Planning • Financial Analysis• Market Analysis• Legal Analysis• Recommendations

• Data Collection• Reporting• Process Improvement• Strategic Planning

• Structure and Form JV• JV Capitalization• Project Financing• Investment Syndication• Equipment Purchase • Project Management

• Facility Development• Operational Process• Reimbursement• Marketing• Reporting and Metrics

Deal Complete Go-live

10 Years3-12 Months

Proven Model for Structured Financing

Technology Manufacturer

Equipment Leasing,

LLC

“Accredited” Physician Investors

Accelitech LLC

Ownership

“Per-Use”Equipment Lease

Hospital

(End Provider)

Financing Company

Technology

Equipment Financing

Leasing Company: Non-recourse, Off-balance sheet financing for:

Equipment Maintenance Program support

Volume risk

Developer: Proven model Legal structure Capital source Speed to marketOptimization Services

End Provider: Facility Licensing Staffing Operations Marketing Billing Reimbursement risk

OptimizationEnsuring Long Term Program Success

Market Driven Management• Operational Process• Data tracking and benchmarking• Physician Liaison Training• Media Campaign• CME events• Physician Training• Remote Treatment Planning• Public Relations Campaign• International Promotion

CONSIDERATIONS FOR MATURE ORGANIZATIONS

Craig D. Frances, M.D.

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Accessing Financing: Private Equity• Long-term equity investment in private companies by professional

investors

• Limited partners include private and public pension funds, endowment funds, foundations, corporations, and wealthy individuals

• The primary use of private equity is to fund long-term growth and provide shareholder liquidity

• Private equity firms offer highly tailored financing which meets a company’s unique needs

• Firms look to add value beyond the financing

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Global Pool of Investable Capital

Sources: UBS Global Asset Management

2006$103.0 Trillion

1969$2.3 Trillion 45x

180xPrivate Equity

Total Capital

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Why Consider a PE partner?

Private equity investors can help entrepreneurs take their companies to the next level

• Entrepreneur wants to take “two bites from the apple”

• Company’s management wants to run (and own) the firm

• Company wants to finance internal growth

• Company wants to finance an acquisition

• Entrepreneur wants to professionalize organization

Most companies eventually reach a crossroads

31

What is a Recapitalization?

Sell Nothing Sell 100%20% 80%

“Recap”

A recapitalization (recap) is a partial sale of equity to finance liquidity for existing shareholders

32

What is a Recapitalization?

3 Years Later Sell Other

50% for 150

150

Choice 2:Sell Today 50% for 50

+

50

Total is 200

200

Choice 1:Sell Today

100% for 100

100

OR

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Benefits of a Recapitalization• Wealth diversification (mitigates risks of concentrated wealth)

• Two bites of the apple

• Partner helps accelerate growth (organic and/or acquisitions)

• Experience maximizing value at exit

• Overall more proceeds than selling 100% at once (assuming things go well)

• Cash out inactive shareholders

• Increase management’s ownership

• Tax advantages (capital gain vs. dividends)

• Remain independent

• Strong assistance from private equity firm

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Benefits of PE Partnership:Board Level Advice

• Good PE firms treat management teams as clients• Focus on corporate and growth strategy• Best practices from other leadership companies• Recruitment of management and board candidates• Sponsorship with the financial community

• Laying the groundwork for successful acquisitions, IPOs, or mergers • Corporate governance

• Devising appropriate stock option, compensation, and incentive programs

• Building and enhancing the functionality of your board

Great companies are built by management teams, not investors

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Benefits of PE Partnership: Executing on an Acquisition Strategy

Investors can assist management in pursuing an acquisition strategy

Capital SupportProvide equity and subordinated debt financing to help fund future operations or acquisitions, as needed.

Strategy Provide advice on the types of acquisitions to seek.

Tools for management

Serve as an additional corporate development team for management-identifying, analyzing, and negotiating an acquisition-help management focus on running the day-to-day operations of the company.

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Case Study: HealthCare Partners

• Operates under global capitation and seeks to produce highest quality, most cost effective care through coordinating delivery (multispecialty model, tiers of care)

• Run by Dr. Bob Margolis, Chair of NCQA. HCP has won extensive awards for quality of care.

• Physician owners were looking to bring on a partner to help set and execute strategic acquisition strategy for diversification and growth

• Sourced 4 possible acquisitions, closed on JSA (Florida)

• Built relationship with JSA team, introduced the parties, worked on deal structuring

• Deal diversified the Company into two more markets

HealthCare Partners is one of the nation’s leading integrated healthcare delivery systems servicing 600,000 members in California, Florida, and Nevada.