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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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