Two hospitals weathered the economic crisis with strong financial ratios. Both had good leadership, and operations were running smoothly following debt offerings for major construction projects. Dedicated investment managers carried them through the rough markets in 2008.

But although one hospital remains strong and is in a position to finance another project, the other faces expensive fees and possible construction delays: What seemed like a responsible update to the latters investment portfolio failed to consider existing debt covenants and inadvertently put the hospital in technical default, triggering penalties and wreaking havoc on what had been an affordable and flexible debt structure.

Taking on or restructuring debt should prompt a review of a hospitals investment portfolio in the context of the revised balance sheet. Too often, however, hospital leaders fail to consider the impact of the investment portfolio on new or newly restructured debt. Failure to build a bridge from the liability side to the asset side creates a
dangerous disconnect and the potential to violate promises to maintain financial ratios.

This presentation discusses covenants as elements that can help establish an appropriate risk tolerance for a hospital, and explains how debt covenants and the credit profile can be impacted by chasing high returns versus following an investment policy statement designed specifically for the hospital.

It reviews the credit profiles relationship to covenants and the potential impact of violating a covenant. For example, selling assets could cause an actual investment loss that causes liquidity to dip below the amount needed to cover portfolio obligations, or it could cause financial ratios to dip below a threshhold set by a lending bank, prompting fee increases.

The presentation also discusses investment policy statements and how they can be created to help hospitals maneuver in rough markets that cause paper investment losses.

Hospital leadership are responsible for communicating debt covenants to investment managers, but if they do not realize the impact of one side of the balance sheet on the other, portfolio managers may never realize that selling an asset from the portfolio could force expenditures from operations to cover portfolio obligations.

Theoretical as well as practical information will be part of the presentation, which includes a case study presented by Rick Harning of Allegan Hospital in Michigan. Allegan had 1999 fixed-rate debt, but it got carried away with expenses and failed to manage its bottom line. The hospital tripped debt covenants. Mr. Harning joined the team after the fact and helped refocus energies on profitable service lines, right the ship, and meet with bondholders to provide updates on progress.