The Department of Housing and Urban Development has created a new option to use federal mortgage insurance to purchase or refinance existing hospitals.

This provides a much-needed resource for hospitals to reduce interest rates, eliminate restrictive debt covenants, exit troubled banking relationships or resolve other market-related debt concerns – with or without borrowing additional funds, as HUD has eliminated the requirement that 20% of the proceeds from a HUD-insured hospital mortgage be used for new construction. Currently, only the strongest hospitals and hospital systems can cost-effectively access the municipal markets. During this difficult economic period, many hospitals seek only to refinance existing debt and stabilize their organizations, rather than borrowing for new projects. For a great many hospitals nationwide, the new FHA/HUD Sec. 242/223(f) program offers that opportunity.

These refinances must be employed to lower a hospital's monthly debt service costs (taking into account any fees or charges connected with such refinancing). The proceeds may be used only to retire existing indebtedness and pay for the cost of the refinance. Any related repairs, renovation, and/or equipment purchases must total less than 20 percent of the mortgage amount.

The change was prompted by several factors that have made access to cost-effective capital difficult at best:

• The downgrades of most bond insurance providers have virtually eliminated bond insurance as a credit enhancement for fixed-rate tax-exempt bond issues.
• Financial difficulties experienced by most regional and national letter-of-credit banks have made it difficult for even the strongest hospital credit profiles to access or renew a letter of credit under reasonable pricing and terms. In many cases letters of credit are not being renewed at expiration, and hospitals are being asked to seek options outside of their existing banking relationships.
• Several hospitals find themselves in a situation where previously structured auction-rate debt remains frozen with no bids.

Lancaster Pollard has been following this development, and already several hospitals have expressed interest in the opportunity. For more information on refinancing your hospital, call (866) 611-6555 or find our nearest office.

The federal notice implementing this new option is located here.

The HUD 242 mortgage insurance provides most hospitals the opportunity to issue up to “AAA” rated debt, and the potential for substantial debt-service savings. The interest rate is fixed through the entire term of the amortization, and the HUD 242 mortgage insurance program is one of the only credit enhancement programs whose premium is not risk-based, making it less subject to market vagaries or whims. The cost of obtaining the mortgage insurance is 50 basis points annually irrespective of your organization’s underlying credit characteristics.

Another important characteristic of the program is that loans insured by the HUD 242 program are secured by a mortgage on the property and a pledge of revenues. The debt is non-recourse to any parent or obligated group, creating the potential for the debt to be viewed as “off credit.” At the same time, and subject to attainment of certain debt-service coverage and liquidity levels, hospitals utilizing the HUD 242 program may transfer excess cash flow to parent health systems or hospitals.

In addition, nonprofit hospitals can utilize mortgage insurance as credit enhancement to issue tax-exempt bonds. The program also offers the flexibility to issue taxable notes in conjunction with GNMA mortgage insurance when economic or non-economic reasons make this solution more cost-effective than tax-exempt bonds, e.g., to reduce the amount of equity required at closing.