(L-R):Nashville Health Care Council Chairman Thomas G. Cigarran; Duncan Dashiff, Shattuck Hammond; William Stiff, Deutsche Bank Securities; Bryan Cressey, Cressey & Company; Jim Elrod, Vestar Capital Partners
Finding Funds in a Tough Economic Climate
All is not grim for healthcare companies looking to expand during a rocky economy while also facing looming uncertainty in healthcare policy. But success will require pragmatism, understanding the industry sectors in which companies wish to invest, working within established relationships, as well as keeping an eye towards reform. These were just a few of the take away points at the Nashville Health Care Council's recent panel program, "Financing the Deal: Strategic Issues for Health Care Companies."
Bryan Cressey, partner at Cressey & Company LP; Duncan Dashiff, managing director of Shattuck Hammond Partners, a division of Morgan Keegan & Company, Inc.; James L. Elrod, Jr., managing director of Vestar Capital Partners, Inc.; and William Stitt, managing director of Deutsche Bank Securities formed the panel that discussed, among other topics, how to secure funding, what deals continue to be attractive and how the current economic climate is impacting deal making opportunities and deal structure.
Funding will hinge on three factors, Cressey told the room of healthcare executives. "One is, you really have to have a deep knowledge of the healthcare sector you are investing in... The second is, you probably have to do even deeper due diligence than normal. Finally, you really have to work with lenders you have worked with before."
Regarding the downturn, he reminded the group that "this too will pass" but not before healthcare companies will be compelled to shift gears.
"Certainly on the larger platforms, the leverage is down," Cressey said. "One technique we are utilizing now that we have used in previous downturns is we are substituting seller debt... In boom times, the sellers want all cash and think that they can get it. In times like this, we are finding sellers to be more receptive to hold seller notes."
Dashiff said where the market was going to go was almost "an impossible question to answer." He added that in terms of deal making, it has slowed dramatically. "The bottom line is if you have transaction opportunities, it's going to be less debt."
And, though the market is significantly less welcoming than in previous years, Dashiff said there are still opportunities for companies that have a particularly clear launch.
"If you have an A-plus management team... a platform company that is profitable... you are operating in an attractive market with growth opportunities both internally and externally, you've got a chance to get a transaction going with a private equity sponsor and on the credit side," said Dashiff.
Stitt added that the deal must be "strategically compelling" to be attractive as the days of economic engineering were over.
"It's more about strategic fundamentals, manageable leverage levels and getting started early," Stitt said.
Elrod agreed that opportunities had fallen dramatically and reminded the group to be cautious about expectations.
"In terms of structuring over the economic cycles, folks in our position at various times over-reward management teams that are big dreamers and at other times over-reward those that are very realistic," Elrod said. "I caution anyone looking for capital to err on that side of the coin."
Cressey advised companies to refinance loans that are going to come due around a year before they are due.
"You will never get the same terms if that happens," he said, adding that in this economy, it is equally important for companies to invest in doing some research as to whom they were hooking up with.
"You are gong to want to make sure that before you get hitched up to that wagon that it's a wagon that has been successful over a number of cycles," said Cressey.
Dashiff said the administration's reform could provide some cost savings.
"There is obviously an emphasis on quality initiatives in the healthcare marketplace, which I think everybody in this room would agree that if you can enhance quality and produce variability of care, there is a pretty significant cost savings to be achieved there," Dashiff said. He added this is already evident in patient performance initiates.
Concurrently, access to healthcare for the uninsured will be costly, he continued. "Arguably there will be some winners in that context because that does mean more money coming into the system so less uncompensated care for hospitals, but at the same time it's a big ticket item... It's pretty likely that there are going to be some blunt instruments that are going to be used to manage costs in the short run for fixing the healthcare system."
Likely winners in healthcare reform, Elrod said, will be companies that are addressing "particular conditions of populations." He continued, "I think there's going to be greater interest in outsourcing. Folks are continuing to focus on what they do well and that creates an opportunity, and I think the area of healthcare informatics is really going to rise up to the top."
Stitt agreed that informatics would be a big winner but that the field remains wide open.
"The question remains, which ones," Stitt said. "There are so many companies in that space, that I think it's difficult to pick winners versus losers unless you dig really deeply into it."
Regarding securing financing, Stitt said healthcare companies need to be cautious as well as pragmatic.
"Be realistic. Get out early. Understand that you are not going to get the deal that you had in 2005 or 2006. It just doesn't exist."