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Long term debt alternatives for hospitals Article

Category: Finance & Accounting Pages: 3 Type: Article Level: College
2. Taxable bonds

Over the past 15 years, hospitals have invested large sums of money in physician
practices and various joint ventures with physician groups. However, these funds come
with a catch: control over whatever the hospital has invested in typically is required to
stay with the hospital. In many cases, this has created a lot of tension between the two
entities -- and this is where bond financing comes in to play.

Bonds carry lower rates of interest than bank loans and permit physicians to retain control
over their operations.

Bonds are a form of debt which has a principal amount (or par value) payable at maturity
and bears interest (the coupon rate) payable at certain intervals. Bonds are similar to
loans from a bank, except that bonds are typically longer in maturity (20 to 30 years) and
are usually sold to third-party investors. Bonds can be taxable or tax-exempt depending
on the tax status of the borrowing entity.

A not-for-profit 501(c)(3) hospital can borrow on a tax-exempt basis (which affords
lower interest rates) due to its nonprofit tax status, whereas, for-profit, private physician
groups borrow on a taxable basis.

Taxable bonds are issued by a physician group and sold to investors (by the group's
investment banker) based on the promise of the group to repay the principal of the bonds
and all interest. Since third-party investors will probably not be familiar with the
particular physician group, a commercial bank with a good credit rating serves as an
intermediary to provide a credit and liquidity guaranty to the investors. The bank then
seeks its own form of security from the physician group.

Physician groups that have borrowed from banks or real