The Capital Issue

February-March 2013

What happens beyond the board room can have significant impact on businesses and organizations in multiple ways, especially on their ability to access capital.

Complex, ever-changing events in the state capital, in Washington and in financial centers around the world will continually influence the capital markets as well as affect the way business is conducted for many sectors. Whether it’s health care reform or tax reform, the slow U.S. economic recovery or the ongoing euro crisis, states regulations or federal mandates, your business decisions are impacted, directly or indirectly, by factors that are largely out of your hands. 

In order to make choices that will sustain profitability and growth, it’s important that any decision you make is well informed. The goal of The Capital Issue is to provide readers with a well-balanced look at the issues and factors that affect an organization’s ability to fund capital projects, refinance debt or grow its investments.

This edition explores: what the public bond market did in 2012 and what may impact it in 2013; how government hospitals can fund capital projects through tax support and how this can vary from state to state; why nonprofit senior living providers are now looking at taxable HUD/FHA programs; the changes in the HUD’s HAP program for Sec. 202 property owners; and the contributors and consequences of asset price inflation.

Tom Green, CEO

Bond Market: How Did 2012 Stack Up? How’s 2013 Shaping Up?
2/20/2013

Bond Market: How Did 2012 Stack Up? How’s 2013 Shaping Up?

For senior living and health care providers issuing debt, 2012 was a banner year.  Despite increased municipal bond issuance, rates remained at historically low levels as demand exceeded supply for much of the year. 

What were the drivers of the robust 2012 market for issuers?  Can these factors continue in 2013 keeping interest rates low while increasing bond volume?    


General Obligation Bonds: A Matter of Public Support
2/19/2013

General Obligation Bonds: A Matter of Public Support

Throughout the country, a fifth of all hospitals are owned by city, county or state governments. Currently, there are more than 1,000 state and local government hospitals, with 29 states plus the District of Columbia having hospital districts.

State and local government hospitals, both large and small, and hospital districts are able to access tax revenues, which can lead to lower borrowing costs in the municipal bond market. Essentially, they or the government entity that owns them can assess property taxes to pay for operating costs or debt service payments, which can provide a lower cost of capital. The general obligation (GO) of the entity’s taxing power is the primary support for a bond issue instead of the revenues generated by the hospital itself.


Top 10 Reasons Why More Nonprofit Providers are Using Taxable HUD/FHA Funding
2/18/2013

Top 10 Reasons Why More Nonprofit Providers are Using Taxable HUD/FHA Funding

Prior to 2008, nonprofit senior living (NPSL) providers commonly used tax-exempt bond financing for funding new money projects and refinancings. At the time, it often provided the lowest cost of capital.

Nonprofits took advantage of their 501(c)(3) tax status to save money while fulfilling their mission. The tax-exempt cost of capital for NPSL providers averaged 2 to 4 percentage points lower than for their for-profit senior living (FPSL) peers, providing nonprofits a competitive advantage for capital financing.

But that was then and this is now. Historically low interest rates have diminished the relative savings from tax-exempt funding, making taxable debt worth another look. Additionally, tax-exempt financing often includes costs, reserves and covenants that are often not required in a taxable financing, including taxable financing through the Office of Housing and Urban Development (HUD)/Federal Housing Administration (FHA).


Changes to HAP Contract Renewal: Financing Implications for Sec. 202 Properties
2/16/2013

Changes to HAP Contract Renewal: Financing Implications for Sec. 202 Properties

Sec. 202 property owners and managers should be aware of several changes made to the housing assistance payments (HAP) contract renewal process by the U.S. Department of Housing and Urban Development (HUD)/Federal Housing Administration (FHA). These updates to the Sec. 8 Renewal Guide and the frequently-asked-questions (FAQ) clarifying Housing Notice 2012-08 will have an impact on Sec. 202 property owners─from budgeting and rent setting to long-term capital structure and strategy. 

Asset Price Inflation: Contributors and Consequences
2/15/2013

Asset Price Inflation: Contributors and Consequences

Conventional wisdom has that looking back to the past often is the best way to prepare for the future. If that’s the case, let’s take a look back at recent history in regards to the Federal Reserve Board (the Fed) in regards to asset prices.

The U.S. equity markets were recovering from the bursting of the tech bubble in 2000 as the economy slipped into recession in 2001. The desire of the Fed at that time was to reduce market interest rates in order to stimulate economic activity largely through increasing expenditures on capital goods by reducing financing costs.