HUD makes it easier for non-profit hospitals to refinance debt

With hospitals continuing to face major challenges in getting reasonable terms on capital financing, the federal government has stepped in to lend a hand. Hoping to help hospitals out of their capital quagmire, the Department of Housing and Urban Development has loosened the rules under which non-profit hospitals can refinance tax exempt debt.

To be eligible for this refinancing program, a hospital's interest rate must have climbed at least 1 percent since January 1, 2008, or borrowers must prove that this kind of increase is on the way. The hospitals must also have an aggregate operating margin of 0.33 percent and average debt service coverage ratio of at least 1.8 for the past three audited fiscal years. For new debt, hospitals seeking HUD insurance must show operating margins of 0 percent (i.e. no negatives) and debt service coverage of 1.25.

In the past, hospitals that refinanced debt by using insurance from HUD were required to spend at least 20 percent of their loans on construction or equipment. Now, HUD has pulled that requirement.

The rule change is designed to help borrowers with variable-rate debt, who have been walloped by rapid interest rate increases as the market struggled to absorb the impact of Wall Street's near-collapse. With HUD's help, these institutions should be able to refinance their debt as long-term bonds with reasonable long-term interest rates.

On the other hand, meanwhile, HUD hasn't exactly started giving away the store. Officials have also adopted tougher financial terms for hospitals that wish to refinance than those who want new loans.

To learn more about the new HUD program:
- read this Modern Healthcare piece