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Appendices

Appendix 1

Glossary

The following is a summary of terms used in funding arrangements and/or found in the “A Guide to Capital Funding Options” that may need clarification or be beneficial to the understanding of funding arrangements. This glossary is designed to be a practical guide to bond terminology.

Advance Refunding – A transaction in which Refunding Debt is issued to pay the Refunded Debt at a specified future date(s), with the proceeds placed in trust or otherwise restricted to pay the Refunded Debt. The trust buys State and Local Government Securities obligations (SLGSs) to permit the defeased debt to be treated as an “in-substance” defeasance under generally accepted accounting principles. Non-profit hospitals report a non-cash loss in an Advance Refunding. Public hospital districts capitalize this loss and amortize it against future earnings under generally accepted accounting principles applicable to governmental organizations.

Amortization Schedule – A schedule showing the debt principal and interest payments.

Annual Debt Service Coverage – The number of times debt payments can be made from hospital operations. Debt service coverage is usually expressed in terms of the ratio computed as follows: (Excess of Revenues over Expenses + Depreciation + Amortization + Interest Expense) / (Annual Debt Principal + Interest Expense).

Arbitrage – The relationship of the interest rates on a debt issue to the interest rates achieved on the temporary investment of bond proceeds. Positive arbitrage occurs when the investment income received is greater than the interest expense on the bonds. The Internal Revenue Service has restrictions on positive arbitrage. See Rebate.

Authority – See Washington Health Care Facilities Authority.

Authority Counsel – Legal counsel to the Authority. Authority counsel serves as Bond Counsel in Authority transactions, and will draft most documents and review the official statement.

Authority Financial Advisor – Financial advisor to the Authority. The financial advisor reviews all documents associated with a tax-exempt revenue bond issue, including the Official Statement, and advises the Authority with respect to bond terms and pricing.

Basis Points – A measure used in assessing interest rates. One Basis Point is one-hundredth of one percent. Accordingly, 25 basis points is ¼ of 1% interest.

Bondholder – The purchaser of bonds.

Bond Counsel – The lawyer who often drafts the documents associated with a bond transaction and gives an opinion on the tax-exempt status of the bonds under Internal Revenue Service regulations.

Bond Documents – A series of up to 50 official documents memorializing a bond transaction. Key documents include the Bond Resolution, Loan Agreement and the Indenture.

Bond Insurance – A form of credit enhancement obtained from a surety company that insures payment of all future bond principal and interest payments for an initial premium at the time the bonds are issued.

Bond Resolution – A resolution of the Board of Commissioners of a public hospital district or the Board of Trustees of a non-profit hospital authorizing the issuance of bonds.

“Bring down” Letter – The bring-down letter is prepared when the bond pricing (typically, the interest rate) on the bonds is higher than that included in the Financial Feasibility Study. The Feasibility Consultant prepares a bring-down letter stating their conclusions with respect to financial feasibility as reflected in the Feasibility Study will not be different as a result of the actual bond pricing.

Call Date – The date(s) bonds may be called for redemption at the option of the borrower. The initial call date is often 7 to 10 years after the bonds are originally issued.

Capital Lease – A lease arrangement that is recorded as a fixed asset and a debt obligation in a balance sheet of the hospital under generally accepted accounting principles, as opposed to an Operating Lease.

Conduit – This is a colloquial term for the Washington Health Care Facilities Authority,or other similar governmental issues that issue tax exempt bonds and loan the proceeds to private parties.

Continuing Disclosure – See NRMSIR.

Credit Enhancement – A vehicle to improve the hospital’s underlying credit risk to the bondholder, such as Bond Insurance or an irrevocable letter of credit from a bank.

Critical Access Hospital – A hospital formally designated as such by federal and state authorities.

Debt to Capitalization - The relationship of debt to equity. Debt to capitalization is usually expressed in terms of the ratio computed as follows: (Long-term Debt) / (Fund Balance [Net Assets in not-for-profit organizations] + Long-term Debt).

Defeasance – Satisfaction of Refunded Debt for accounting purposes without the debt being legally retired.

Demand Study – The demand study is part of the Financial Feasibility Study. It assesses the demand for hospital services based on factors such as service area demographics, historical marketplace penetration, the local economy, medical staff age and use of the hospital, competing hospital facilities and the impact of any proposed service changes as a result of a construction project.

Due Diligence – The process parties associated with the bond transaction undertake to ensure the hospital’s representations in connection with the bond documents are complete and accurate.

Excess Levy – A special levy for a given year or years in excess of the regular property tax. Voter approval is required for excess levies.

Hospital Financial Advisor – The financial advisor to a hospital. If the hospital elects to retain a financial advisor, the Hospital Financial Advisor assists the hospital with bond terms and structure. In Washington, not every non-profit hospital elects to use a Hospital Financial Advisor as the Authority Financial Advisor partially fulfills this responsibility. Public Hospital Districts may wish to consider a Hospital Financial Advisor when issuing Unlimited and Limited Tax General Obligation bonds.

Feasibility Consultant – The Feasibility Consultant is employed by the hospital to issue a Financial Feasibility Study report. The Feasibility Consultant reports to the hospital, the Authority (or other tax-exempt conduit requiring the feasibility study) and the Underwriter.

Financial Feasibility Study – The Financial Feasibility Study is prepared to assess the hospital’s ability to meet its future debt service and other financial obligations for two years following completion of a construction project. The hospital Board may request either management or an external feasibility consultant to prepare an initial feasibility study. The Authority (or other tax-exempt conduit requiring the Financial Feasibility Study) and the Underwriter require the Financial Feasibility Study to be prepared by a party independent of the hospital.

General Obligation Bond – Public hospital districts may issue voter or non-voter approved bonds to acquire or construct a hospital or “other health care facility” as defined in the Revised Code of Washington. General Obligation Bonds are commonly referred to as G.O. Bonds.

Hospital Counsel – Legal counsel for the hospital. Hospital Counsel is familiar with the hospital and represents its interests. Hospital Counsel supports the efforts of the hospital during the negotiation of bond document terms and conditions, reviews all bond documents for the hospital, assists the hospital in gathering information for the Due Diligence review of legal counsel and reviews the Official Statement and all other bond documents on behalf of the hospital.

Indenture – The Trust Indenture between the Authority and the Trustee.

Institutional Distribution – Purchasers of large dollar amounts of hospital bonds, such as banks, pension funds and insurance companies. Typically, institutional investors purchase a larger percentage of the bonds than are sold at retail.

In-substance Defeasance – A form of Advance Refunding in which the debtor places into an irrevocable trust an amount of assets computed to be sufficient to satisfy all future principal and interest payments of a specific debt obligation until the debt is callable at the first Call Date. In such cases, the debt is not considered legally extinguished because the hospital is not released from being the primary obligor. However, the debt is removed from the balance sheet and replaced with the Refunding Debt issue, and the Refunded Debt is disclosed in the footnotes to the financial statements.

Issuance Costs – Costs reasonably incurred incident to preparing, offering, selling, issuing and delivering the bonds, including the fees and expenses of Bond Counsel, general and special counsel and Financial Advisor to the Authority, accountants, financial consultants and legal counsel to the hospital, the costs of feasibility reports, audits, rating agency fees, title insurance premium, recording and filing fees, the initial annual fee payable to the Authority and the fees and expenses (including reasonable counsel fees and expenses) payable to the Trustee incident to the Trustee’s acceptance of the trust created by the Indenture.

Issuer – The organization issuing the bonds. Typically, the Authority issues tax-exempt revenue bonds and loans the proceeds to the hospital in non-profit hospital bond financings. A public hospital district may issue its own bonds.

Investment Banker – See Underwriter.

Limited Tax General Obligation Bond – Public Hospital Districts may issue bonds payable solely from its regular tax levy. The bond proceeds may be used for any legal purpose of the District. Limited General Obligation Bonds are commonly referred to as L.T.G.O. Bonds.

Liquidity Facility – See Credit Enhancement.

Loan Agreement – The agreement between the Authority and a hospital under which bonds are issued.

Material Events – Rules issued by the Securities and Exchange Commission prohibit, with certain exceptions, a broker or dealer from purchasing or selling tax-exempt securities unless the issuer of the securities enters into a written agreement for the benefit of the ultimate purchasers of such securities to provide notices of “material events” to the NRMSIRs. Under the applicable rules, “material events” are limited to the following eleven events:

1. delinquencies in debt service payments;
2. non-payment related defaults;
3. unscheduled draws on debt service reserves reflecting financial difficulties;
4. unscheduled draws on credit enhancements reflecting financial difficulties;
5. substitution of credit or liquidity providers, or their failure to perform;
6. adverse tax opinions or events affecting the tax-exempt status of the securities;
7. modifications to rights of security holders;
8. bond calls;
9. defeasances;
10. release, substitution or sale of property securing repayment of the securities; and
11. rating changes.

Maximum Annual Debt Service Coverage – The number of times debt payments can be made from hospital operations. Maximum annual debt service coverage is usually expressed in terms of the ratio computed as follows: (Excess of Revenues over Expenses + Depreciation + Amortization + Interest Expense) / (Maximum Annual Debt Service).

NRMSIR – The nationally recognized municipal securities information repository designated by the SEC for purposes of Rule 15c2-12. The hospital is obligated to report selected information to NRMSIR annually to facilitate bondholder review of hospital information and secondary bond market trading.

Negative Pledge – A loan covenant where a hospital agrees not to mortgage its facilities in the future while debt being borrowed remains outstanding.

Non-Negotiable Bond Conditions – This is a colloquial term often used to describe standard document terms that will not change in any transaction due to lender policy considerations. For example, the granting of a mortgage is often a Non-Negotiable Bond Condition.

Obligated Group – A group of borrower corporations that works together to borrow money and provide collateral jointly. The Obligated Group is jointly liable for its outstanding debt. Hospital systems tend to use Obligated Groups.

Official Statement – The Official Statement is used to market the bond issue. The Preliminary Official Statement (POS) discloses pertinent operating and financial information about the hospital, the bond transaction and bondholder risks to prospective bond purchasers, without pricing information. It is occasionally referred to as the “red herring” due to the red ink on the front cover stating the information is preliminary and subject to change. The final Official Statement (OS) is updated to reflect final bond maturity and pricing information.

Operating Lease – A lease arrangement that is treated as an annual operating expense under generally accepted accounting principles, as opposed to a Capital Lease.

Original Issue Discount – A discount from the par value of the bond to the original bond purchaser, used as a sales incentive strategy to obtain a lower bond interest rate.

Par amount – The face amount of a bond.

Parity Debt – Separate debt issues that share the same collateral.

Private Placement – The sale of securities to a single or small group of purchasers. The Underwriter identifies the purchasers, which are often insurance companies or pension funds.

Refunded Debt – Debt for which payment at a specified future date has been provided by the issuance of refunding debt.

Refunding Debt – Debt issued to provide funds to pay for refunded debt at a specified future date.

Rating Agency – Organizations such as Moody’s, Standard and Poor’s and Fitch review the bond documents, meet with hospital representatives to assess the hospital’s creditworthiness and assign a bond rating to the hospital and its bonds.

Rebate – Under the Internal Revenue Code, positive Arbitrage must be rebated to the federal government.

Reimbursement Agreement – The Reimbursement Agreement between the borrower and a company providing a letter of credit (see Credit Enhancement). It describes the terms and conditions of the letter of credit arrangement.

Reserve Account – An account funded by the hospital and held by the Trustee in a tax-exempt revenue bond transaction. The Reserve Account usually contains one year’s principal and interest payment, which theoretically enables the hospital to correct operating problems without missing a bond payment.

Retail Distribution – Bonds sold to individual investors by local brokers.

Rural Hospital – For this report, hospitals under 100 beds are considered rural.

Serial Bonds – Serial bonds are part of the bond principal repayment structure during approximately the first 10 years the issue is outstanding. Serial bonds have stated annual maturities and interest rates.

Springing Mortgage – An agreement to place a mortgage on the hospital in the event certain negative circumstances occur, such as not meeting a financial ratio loan covenant.

Stub Period Data – Interim financial information included in the Official Statement.

Synthetic Lease – A form of off-balance-sheet financing used to acquire assets with a shorter economic life. The use of synthetic leases has slowed in recent years.

Tax-Exempt Bond – A bond exempt from income tax in the return of the Bondholder. The Bond Lawyer will produce an “opinion of counsel” which states the bonds are tax-exempt under the Internal Revenue Code.

Term Bonds – Term bonds are part of the bond principal repayment structure, after the Serial Bonds have matured. Term Bonds also have stated maturities and interest rates which are usually in 10-year increments following the Serial Bonds.

Term Sheet – A lender’s preliminary summary of bond conditions presenting the major terms and conditions under which the bonds will be issued.

Trustee – An organization hired by the hospital to fulfill the duties assigned to it in the bond documents after the bonds are issued, such as paying agent, registrar, authenticating trustee, transfer agent and secondary market disclosure agent. The Trustee monitors hospital performance of required notices, maintaining bond trust accounts for the payment of principal and interest, etc. The Trustee is often a bank trust department.

Trustee Counsel – Legal counsel for the Trustee.

Underwriter – The bond underwriter is engaged by the hospital to sell the bonds to the public and institutional investors. The Underwriter is the “quarterback” for the transaction, coordinating the efforts of all parties associated with the transaction. The Underwriter prepares a calendar of transaction timing and responsibilities, prepares the preliminary and final Official Statements, proposes the terms and sales price for the bonds and purchases the bonds for resale to the general public.

Underwriter’s Counsel – Legal counsel for the Underwriter. Underwriter’s Counsel is often responsible for the preparation of the Official Statements.

Underwriter’s Discount – The fee paid to the underwriter to sell the bonds. The Underwriter’s Discount includes the commission for selling the bonds, the transaction management fee and Underwriter expenses.

Variable Rate Debt – A debt instrument that allows hospitals to borrow at short-term rates with a long-term stated maturity without some of the risks traditionally associated with commercial paper. Hospitals usually are required to have a Liquidity Facility in conjunction with Variable Rate Debt.

Washington Health Care Facilities Authority – The Washington Health Care Facilities Authority was created by the Washington State Legislature to assist non-profit health care providers (exempt from income tax under section 501(c)(3) of the Internal revenue Code) access tax-exempt financing. The Authority members are high-ranking State officials and a public member. They offer both bond and lease funding. The Authority is not able to fund projects that include activities operated by organizations subject to federal income tax. Many other States besides Washington have similar authorities. Some states permit local authorities to be formed for this purpose.

Appendix 2

Blank Addendum Template

The blank template was used to collect information from potential funding resources. This blank template can be used by other organizations to submit capital funding information to the AWPHD to be considered for inclusion as addenda to this directory.

BLANK FUNDING RESOURCE TEMPLATE

Funding Type:

Available to (“x” as applicable) _ Public Hospital District _ Not-For Profit Hospitals
_ Critical Access Hospital _ Less than 100 Beds (rural)

Amount of Funding Available

Limitations on Use of Funds

Interest Rate

Range of Loan Maturity Dates

Typical Cost of funding

Time from Application to Funding

Typical Covenants

Collateral Requirements

Credit Enhancement Requirements

Reserve Account Requirements

Trust Account Requirements

Annual Reporting Requirements

Prepayment Limitations

Public Vote Requirement

Application Process

Unusual Funding Characteristics

Deadline for Using Funds

For Lease Arrangements
Date title transfers
Capital or Operating Lease

Grant Parameters
Purpose and activities
Low to high grant range

Organization Providing Information
Name of Organization
Contact Person
Contact’s Position
E-mail Address
Phone Number
Fax Number
Organization Website

General Comments/Observations

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