Question

Short-Term Debt Financing Your assignment for this unit is to write an essay analyzing short-term debt financing options for a healthcare facility. The first part of this assignment is to come up with a facility that you wish to analyze. You may create your own facility name, background, and information, or you can base the facility on a healthcare organization with which you are familiar. Be sure to include a name for your facility, whether it is fictitious or real. Give a brief description of your facility, including information about its history, its current financial situation, and whether it is for-profit or nonprofit.

Once you have chosen a facility and provided the background information, it is time to discuss the short-term debt financing options for your facility. Include the following components in your essay: Compare and contrast three different external short-term debt-financing options that are available for your facility.

Suppose that your facility is projected to face a cash shortage later this year. Which of the options you listed would be the best option to cover this shortage at your facility? Why?

Answer 1

Healthcare Facility Name : MIRZA CHARITABLE HOSPITAL LIMITED

History: Mirza Charitable Hospital Limited is a Public incorporated on 01 October 2009. It is classified as Non-govt company and is registered at Registrar of Companies, Kanpur, India. Its authorized share capital is Rs. 5,000,000 and its paid up capital is Rs. 4,700,000. It is involved in Human health activities. Directors of Mirza Charitable Hospital Limited are Mukhtarul Amin, Irshad Mirza, Shahid Ahmad Mirza, Tasneef Ahmad Mirza, Ankit Mishra, Bhuwanendra Mani Pandey, Gopal Swaroop Agrawal, .

Financial Situation: It is a public company being run by Mirza International Limited under an Scheme of Corporate Social Responsibility as required by The companies act, 2013 of India. The company receives its funds by way of a share of profit limited to 2% of profit of Mirza International Limited. Other than that it is funded by shares and it receives its income by way of nominal token fee for patient interaction appointments with doctors and sale of medicines. Other than that Patient inspection and Doctor's fee is spent by company on its own.

Information: It is run with a motive of non-profit and charitable entity. It is a real entity although some figures and facts may be subject to confirmation.

Financing Option:

1- Bonds

Since not-for-profit hospitals cannot issue stock, they often turn to debt financing through the issuance of tax-exempt bonds. For-profit entities have the option of issuing stock in addition to issuing bonds — although not tax exempt. When evaluating a hospital or health system, the type of financing and debt-to-income ratio should be considered.

When assessing bonds, whether issued by a for-profit or not-for-profit entity, four characteristics should be considered:

1. Term to maturity;

2. Interest rate type (fixed v. variable);

3. Utilization of bond insurance; and

4. Revenue vs. general obligation bond (municipal bond specific).

[Note: General obligation are those bonds that are backed by the full faith and credit of the issuer. Revenue bonds are backed by the revenue generated by the specific project being financed through the bond issue.]

Fixed-Rate Bonds. These bonds are the most commonly issued debt by not-for-profit hospitals and systems, and they represent the least risky debt structure available for borrowers. Fixed-rate debt essentially transfers all market risks to the investors and, as a result, typically represents the most costly form of tax-exempt or taxable debt. The interest rate paid on a fixed-rate bond does not change during its lifetime. Even though each maturity of an issued bond may have a different interest rate, the investor purchasing the bond receives a fixed rate of return for the entire period during which the bonds are outstanding.

Variable-Rate Bonds. Variable-rate or floating-rate bonds or notes have rates that are reset daily, weekly, or monthly. The interest rate paid by the borrower fluctuates with each rate reset based on an interest rate index that reflects current, but changing market conditions.

Type of Bonds:

1- Zero Coupon bond - No Coupon/ Interest paid at intermediate years, and full redemption at maturity.

2- Plain Vanilla Bonds - A plain vanilla bond is a bond without any unusual features; it is one of the simplest forms of bond with a fixed coupon and a defined maturity and is usually issued and redeemed at the face value. It is also known as a straight bond or a bullet bond.

3 - Deferred Coupons Bond- This type of bond is a blend of a coupon-bearing bond and a zero coupon bond. These bonds do not pay any coupon in the initial years and thereafter pay a higher coupon to compensate for no coupon in the initial years.

4- Floating rate bonds - Floating rate bonds are so called because they have a coupon which is not fixed but rather linked to a benchmark.

2- Direct Bank Loans

Unlike bonds, direct bank loans do not require a public rating for the underlying credit, can be implemented with the broadest range of banks, and can frequently be completed on a faster timetable than is true for many public market alternatives. Direct loans can also offer hospitals a useful tool to gain floating-rate exposure without some of the risks attached to public market structures.

Direct loans can yield reduced costs of capital for hospitals that may not have access to other financing products that offer lower costs. However, with lower costs often come additional restrictions and legal covenants that can range from expanded coverage of existing public debt covenants to lender review and approval for every financial decision. Direct loans can be either tax-exempt or taxable. Tax-exempt loans are issued through a conduit agency (e.g., an authority or city) and funded by the bank; taxable debt is issued directly by the bank with no need for a conduit issuer.  Direct loans may provide hospitals with “committed” funding for a period of time; however, at the end of the loan term, the loan must be renewed (and repriced), refinanced, or perhaps termed out, if renewal or refinancing are not alternatives.

3- Leasing

Leasing represents a major form of capital formation for investment in equipment and real estate by not-for-profit hospitals and health systems. To date, two types of leases have been common in health care:

A) Finance/Capital leases, and

B) Operating leases.

A capital lease is a leasing arrangement in which the lessee seeks a long-term commitment to use the asset with or without the eventual opportunity to purchase the asset.

An operating lease is a lease with no transfer of ownership interest or title between lessor and lessee. The lessee makes “rent payments,” which are recorded as an operating expense as they occur.

Use of leases as an alternative source of capital beyond traditional bank loans and bond financing is entirely appropriate and effective in many cases, especially for smaller hospitals that have limited or no access to public market alternatives. This may be especially true of short-lived assets for which long term financing may be inappropriate.

Comparison Between Three Alternatives

Bonds can be issued of different kinds. For Example a Zero Coupon Bond or a deferred Coupons Bond involves no initial cash outflow. Other options may include initial outflow. On the Other hand Direct Bank Loan can also be customized to include a moratorium period that allows to defer the initial year's cash outflow of installments. These two options can be exercised for meeting Capital Expenditure and Revenue Expenditure. But when it comes to leasing, the assets can be obtained on lease but not every expense can be met with leasing option. Bonds comes with a relatively higher interest/ coupon expenses than bank finance.

Now,

Supposing that our facility is projected to face a cash shortage later this year. Then bank financing with a moratorium period or bond Financing with the options of Zero Coupon or Deferred Coupon will be best suited to meet this cash shortage at our facility? Because if there is a cash shortage then we will be hoping to defer our cash expenditure to coming years. The Best option will be of issuing a Zero Coupon Bond of maturity of 5-6 years as a short term financing option.