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					        Upswings, Downturns, Yield Curves and You:
        Market Factors Affecting Community and Rural
                 Hospital Financing Options

                     Indiana Rural Health Association
                              June 10, 2009




Financing Progress
                         Table of Contents
       Finance Structuring
       Capital Markets Update
       New Funding Options
       Case Studies
       Summary
       Appendices




2   Financing Progress
                         Finance Structuring




3   Financing Progress
                                        Structuring Options
                                                      Revenue
                                                       Bonds




                           Unrated                  Rated                                Rated
                         Unenhanced               Unenhanced                            Enhanced




                                                                   Variable Rate
               Fixed Rate      Direct Placement   Fixed Rate                          Bond Insurance     FHA / USDA
                                                                   Letter of Credit



                                                          May Swap
                                                         Desired % to
                                                          Fixed Rate


                                                                             Variable Rate         Fixed Rate


                                                          May Swap
                                                         Desired % to
                                                          Fixed Rate




4   Financing Progress
                         Capital Markets Update




5   Financing Progress
              Bond Insurer Ratings - Downgraded
           Claims Paying Ability
                                                              Insurer
            Moody's/S&P/Fitch
                  Ba3/A/na                        AMBAC Assurance Corporation
                Aa2/AAA/AA                        Assured Guaranty Corp. (AGC)
                 Ba3/BB/na                      CIFG Assurance North America, Inc.
                                              Financial Guaranty Insurance Company
                 na/CCC/na
                                                             (FGIC)
                                                 Financial Security Assurance, Inc.
               Aa3/AAA/AAA
                                                              (FSA)
                 Ba1/AA-/na                         MBIA Insurance Corporation

                  Ca/CC/na               Syncora Guarantee (formerly XL Capital Assurance)

                  Aa1/AAA                         Berkshire Hathaway Assurance

                Ba1/BBB-/na                        Radian Asset Assurance Inc.


    •Red highlights indicate downgrade

6   Financing Progress
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                                                                                                             10 Yr Treasury




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                                                                                                                              Flight to Quality




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BBR
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                          Date

30-Year A3 Healthcare
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                                                                                                         Historical Fixed Rate Healthcare Yields




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30-Year BBB1 Healthcare
                                 11/6/2005
                                                                                                                                                   Rising Healthcare Yields




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                              Historical Tax-Exempt Rates (15 Yrs)
                                                                         Tax Exempt Rates: Fixed vs. Variable

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                                                                                                              SIFMA            BBR


9   Financing Progress
                                 Historical Tax-Exempt Rates (1 Yr)
                                         Tax Exempt Rates: Fixed vs. Variable

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                                                        SIFMA   BBR


10   Financing Progress
                                          Low Fixed Swap Rates


                                 Maturity      SIFMA   67% of LIBOR
                                    1          0.99%      0.93%
                                    2          1.33%      1.21%
                                    3          1.72%      1.52%
                                    4          2.07%      1.78%
                                    5          2.34%      1.98%
                                    7          2.73%      2.27%
                                   10          3.07%      2.51%
                                   15          3.41%      2.73%
                                   20          3.53%      2.78%
                                   30          3.71%      2.82%

     *Swap Rate Estimates from mid May 2009


11   Financing Progress
                          New Funding Options




12   Financing Progress
                             FHLB LOC
         On July 30, 2008, Housing and Economic Recovery
          Act of 2008 (HERA) signed into law
         FHLB’s allowed to provide LOC to credit enhance tax-
          exempt, non-housing bonds
         Provides access to VRDO market via non-rated or
          low-rated community banks
         12 FHLB’s in country
         Indiana & Michigan banks are under the Indianapolis
          FHLB (AAA-rated)
         FHLB currently authorized to provide LOC credit
          enhancement to tax-exempt, non-housing deals
          through Dec. 31, 2010


13   Financing Progress
                          Bank Qualified Bonds
         Banks may not deduct the carrying cost of tax-exempt
          municipal bonds unless BQ; 1986 IRS Tax Code
          allows banks to deduct 80% of the carrying cost of BQ
          bonds
         Changes to BQ requirements were included in the
          American Recovery and Reinvestment Act (signed into
          law February 17, 2009)
         BQ max increased from $10MM to $30MM
         BQ measured on a per borrower basis, rather than a
          per issuing authority basis




14   Financing Progress
                          Build America Bonds
         BABs were included in the American Recovery and
          Reinvestment Act (signed into law February 17, 2009)
         Interest on BABs is taxable to the bondholder, but tax
          credits are provided in lieu of the tax-exemption
         Provides access to larger and potentially more efficient
          taxable markets for bond sale
         BABs are for state or local governmental entities (not
          501c3’s)
         BABs can be issued from February 17, 2009 through
          2010




15   Financing Progress
                          FHA 242 Considerations
         FHA 242/223(f) Refinance
               Eliminate 20% new money requirement
         FHA 242 LEAN Process
               Increase processing efficiency
               Modeled after FHA 232 LEAN program
         FHA 242 REMIC Eligibility
               Create another REMIC eligibility test that does not
                depend on collateral consisting of at least 80% real
                estate
               Open up larger investor market for 242 GNMA’s
               Projected to significantly drive down cost of capital for
                242 GNMA’s


16   Financing Progress
        Municipal Bond Insurance Enhancement Act
            Introduced: May 21, 2009 at House Financial Services Committee
             (Sponsor Rep. Barney Frank)
            Summary:
               The downgrades of most bond insurance companies over the past 18
                months have made it more difficult and costly for municipalities to issue
                bonds.
               The legislation would aid municipal issuers by providing federal
                reinsurance for municipal-only primary bond insurance.
               Treasury-provided reinsurance would make it easier for smaller, lesser
                known issuers to borrow in the capital markets by increasing capacity of
                municipal bond insurers to insure new risks.




      *http://www.house.gov/financialservices/


17   Financing Progress
        Municipal Bond Insurance Enhancement Act
           Bill Accomplishes:
               Creates the Office of Public Finance within the Treasury Department
                specifically to provide reinsurance for municipal-only bond insurers in the
                most cost effective manner. Eligible insurers are those that are licensed
                in one or more of the 50 states.
               The Office of Public Finance will set risk-based premium rates at a level
                that is sufficient to maintain a negative credit subsidy under the Credit
                Reform Act as well as cover administrative costs of the program.
               The Office of Public Finance shall set other program terms consistent
                with providing additional capacity in the market for municipal bond
                insurance.
               The reinsurance program is limited to reinsurance of a par amount of no
                more than $50 billion annually for fiscal years 2011 through 2015.
               Treasury is directed to submit to divest the reinsurance program after no
                more than five years.
               Sec. 149 of the Internal Revenue Code is amended so reinsured bonds
                can remain tax-exempt.

18   Financing Progress
            Municipal Bond Liquidity Enhancement Act
            Introduced: May 21, 2009 at House Financial Services Committee
             (Sponsor Rep. Barney Frank)
            Summary:
               Variable rate municipal bonds are long-dated securities for with the
                interest rate resets on a short-term basis.
               Investors that purchase the bonds at short-term rates as short-term
                investments have the right to redeem the bond at set periods that
                can range from daily to several weeks.
               This function is supported by a liquidity facility, or standby bond
                purchase agreement provided by banks for a fee.
               As bank balance sheets have become constrained over the past 2
                years, the availability of new liquidity facilities has decreased as their
                cost has increased.
               The legislation would provide the Federal Reserve with the authority
                to fund new liquidity facilities for certain securities.



      *http://www.house.gov/financialservices/


19   Financing Progress
            Municipal Bond Liquidity Enhancement Act
           Bill Accomplishes:
               Amend the Federal Reserve Act to permit the Federal Reserve to lend money
                to a special purpose vehicle or designated corporation to finance standby
                bond purchase agreements, or liquidity puts. The loans would be secured by
                municipal variable rate demand notes and short-term cash management
                notes for which the liquidity put is being provided.
               Amend the Emergency Economic Stabilization Act to authorize the Treasury
                Department to use TARP funds to in connection with a Federal Reserve
                facility. The TARP funds would be used as credit protection for the Fed
                facility similar to the structure of the TALF.
               The use of the funds would be restricted to funding the purchase of variable
                rate demand notes (already issued at the time of enactment), variable rate
                demand notes issued to refund municipal auction rate securities or short-term
                cash management notes.
               The bill clarifies that the Federal Reserve may cooperate with the Treasury
                Department and other federal agencies in providing such financing.
               Sec. 149 of the Internal Revenue Code is amended so any bonds backed by
                Federal Reserve-financed liquidity would remain tax exempt.


20   Financing Progress
                          Case Studies




21   Financing Progress
                               FHLB LOC Case Study
           Borrower: Swiss Village
           Borrower Type: Non-Profit Senior Living Provider (CCRC)
           Borrower Location: Berne, IN
           Par Amount: $6.9MM
           Deal Uses: Fund construction of wellness center and renovations to assisted living
            facility
           Deal Structure: Tax-Exempt VRDB
           Enhancement: Indianapolis FHLB LOC via two local banks
           Rating: AAA/A-1+ (S&P)
           Cost of Capital: 70% Fixed (4.1%); 30% Floating (currently 1.0%)
           Term/Amortization: 25 Years
           LOC-Term: 10 Years (renewable)
           Notes:
                 First tax-exempt, non-housing FHLB LOC transaction completed in country post
                  legistlation
                 Another FHLB Indy LOC deal scheduled to close in June 2009
22   Financing Progress
                          FHLB LOC Case Study




23   Financing Progress
                                 FHA 242 Case Study
           Borrower: Carlinville Area Hospital
           Borrower Type: Critical Access Hospital
           Borrower Location: Carlinville, IL
           Par Amount: $19MM
           Deal Uses: Fund replacement hospital
           Deal Structure: FHA 242 GNMA
           Enhancement: FHA 242 Mortgage Insurance
           Rating: AAA (S&P)
           Term/Amortization: 25 Years
           Notes:
               First 242 CAH deal in Illinois
               First 242 deal in Illinois since 1996
               Last Indiana 242 deal was funded in 1979 (Methodist Hopsital of Gary)
               3 242 deals have been funded in Indiana


24   Financing Progress
                                FHA 242 Case Study
                          OLD                  NEW




25   Financing Progress
                          Summary




26   Financing Progress
                                     Summary
         Access to capital, especially for smaller unrated credits, is limited
          in today’s capital markets
         Healthcare credit spreads have widened
         Bond insurance is essentially unavailable
         Traditional bank LOC’s are difficult to secure, and when secured,
          can be costly with unfavorable terms
         Agency finance options provide stable funding alternatives
         New federal initiatives are opening up new and amended funding
          options
         Hospital leadership teams should keep their finance options open
          (do not commit to one finance option)
         Hospital’s investment banker should multi-track all available
          options

27   Financing Progress
                                      Presenter:
                                 Steven W. Kennedy Jr.
                          Vice President / Investment Banker
                             Indiana & Illinois Market Head
                                     Lancaster Pollard
                              65 East State Street, 16th Floor
                                   Columbus, OH 43215
                                  Phone (614) 224-8800
                                    Fax (614) 224-8805
                           Email skennedy@lancasterpollard.com
                                  www.lancasterpollard.com




28   Financing Progress
                            Appendix A:
                          FHA 242 Program




29   Financing Progress
                           FHA 242 Overview

           Started in 1968
           300 loans (70 outstanding)
           40 states and Puerto Rico
           > $9 Billion loan volume ($4 Billion outstanding)
           Special underwriting criteria for CAH’s




30   Financing Progress
                          FHA 242 Program Advantages

            “AAA” debt rating
            No financial guarantees required
            Underwriting on proforma results
            Up to 25-year amortization with matched insurance
             commitment
            .50% annual insurance premium
            Low, long-term fixed interest rates
            High loan-to-value can minimize upfront cash/equity
             requirements


31   Financing Progress
                     FHA 242 Program Disadvantages

         Higher issuance costs
         Build significant debt service reserve fund
         Mortgage required
         Few transactions completed across nation each year –
          Average of 9 transactions funded annually from FY
          2003-2008




32   Financing Progress
                          FHA 242 Requirements

         Operating Margin: Positive for last 3 fiscal years
         Debt Service Coverage Ratio: 3-yr historical average >
          1.25x
         Recast financials based on CAH status allowed
         90% LTV (equity includes net PPE utilized in project)
         Mortgage required




33   Financing Progress
                          Appendix B:
               USDA Community Facilities Program




34   Financing Progress
              USDA Community Facilities Advantages

         Direct & guaranteed loan options
         “AAA” debt rating (on guaranteed portion)
         One-time 1.00% guarantee fee
         Up to 40-year amortization
         Fixed or variable interest rates
         High loan-to-value can minimize upfront cash/equity
          requirements
         Taxable – flexible use of proceeds – MOBs, working capital,
          etc.


35   Financing Progress
           USDA Community Facilities Disadvantages

          Limited funding source for direct loans
          Only taxable – therefore interest rates are higher than
           tax-exempt options
          USDA’s inexperience in hospital finance
          Guarantee covers 90% of debt
          Community designated rural i.e. less than 20,000
           population
          No guaranteed construction loans



36   Financing Progress

				
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