Accounts Receivable Securitization for Healthcare Organizations

by Eric Bruno

Is a Securitization a Viable Financing Option For You?

Securitization is a committed, debt capital option available to leading companies within the broad healthcare sector to finance or monetize an accounts receivable portfolio. Specific healthcare industries that maintain securitizations include hospital systems, medical laboratories and research, drug manufacturers, and medical devices and equipment. In broad terms, Securitization is a financing technique for many asset classes, both consumer (e.g. auto loans and leases) and commercial related (e.g. accounts receivable). Beyond the healthcare sector, securitizations are maintained by large corporations across diverse industries that have either an investment grade or a non-investment grade credit profile.

Securitization may allow your company to efficiently leverage the value of your accounts receivable into a low-cost, committed financing platform. In practice, your company will receive cash due from its accounts receivable immediately, and such proceeds can be used for any corporate purpose, including reducing more expensive debt or reinvesting into the business.

When to Consider a Securitization?

Securitization is most frequently used by healthcare organizations to repay more expensive debt and more efficiently fund permanent working capital. Securitization proceeds can be used for any corporate purpose, including fund share repurchases, dividends, acquisitions and capital expenditures and issue letters of credit. If the securitization is structured as a monetization, it can also improve balance sheet metrics.

If one or more of these applications might benefit your organization, the following questions will help you determine if your organization will qualify:

  • Does your company have domestic receivables above $100 million, net of contractual allowances and excluding self-pay consumer receivables?
  • Does your company have a corporate credit rating of at least B by Moody’s and/or B2 by S&P (or the equivalent)?
  • Does your company have a core need for funded debt or letter of credit issuance?
  • Does your company have a dedicated lockbox/collection account network for accounts receivable payments?
  • Do your company’s credit agreements permit a securitization, receivables purchase facility, receivables monetization, or factoring arrangement?  If not, can the matter be negotiated?

What Makes a Securitization Unique?

Financing of accounts receivable has been done by banks, commercial financiers, and the capital markets for many years. Securitization is one of several forms of accounts receivable financing; others include invoice discounting, receivables purchase, factoring, asset backed loans, and other variations, all of which are executed in the bank market and specialty finance market. Broadly speaking, securitizations are often executed in the capital markets, but in the case of the accounts receivable asset class, the bank market has been a more flexible and efficient source of capital for many companies.

From a structural perspective, receivables’ cash flows are legally owned by a company’s limited purpose entity, which is structured to be a bankruptcy-remote entity. The combination of the legal structure, some form of credit enhancement, and diverse cash flows from the discrete asset allow for lenders and investors to provide a facility with many benefits to the underlying operating company. A key benefit is an interest cost that is relatively low vs. other forms of committed financing and working capital solutions.

The structure is revolving so new receivables generated are continually providing financing value. The business continues to manage its customers and receivables (and related collections) in the same manner as it did before the securitization.  Such servicing control can be a more favorable arrangement than other accounts receivable financing solutions in the market such as traditional factoring.

Case Study: Universal Health Services, Inc.

Universal Health Services, Inc. (UHS) is a leading owner and operator of acute care hospitals, behavioral health facilities, and ambulatory centers with annual revenues of over $10 billion.  UHS has maintained an accounts receivable securitization in various forms for more than 24 years.  The securitization is UHS’ lowest-cost source for funded debt and works in concert with a diversified debt capital structure.

The securitization has been beneficial to UHS throughout many credit market and economic cycles. During that time, the facility has grown from $85 million to $440 million and as a proportion of UHS’ debt capital structure; securitization represents ~10% of UHS’ total outstanding debt. Most recently, the securitization size was increased to $440 million with the addition of a newly constructed acute care facility.

PNC, as agent, along with three other participating banks each provide a 3-year commitment to the transaction.  Collateral for the transaction comprises accounts receivable from 22 hospitals within the company’s acute care hospital services segment.

The low cost of capital accounts receivable securitization program is an important part of the UHS capital structure.  PNC has been a strong partner and agent on the facility, including their leadership in addressing changes under the facility required to meet the evolving needs of our company

             -Cheryl K. Ramagano, Senior Vice President and Treasurer, Universal Health Services, Inc.

Ready to Help

PNC has been a market leader in structuring, arranging and executing accounts receivable securitizations for nearly 10 years and has been active in the securitization market since the late 1980s.  As of October 31, 2017, PNC maintains one of the most experienced teams in the accounts receivable market, having executed over 100 unique accounts receivable securitizations in the past 5 years, including many for first time users.

Talk to a PNC relationship manager and a PNC securitization professional about a customized securitization solution that may provide greater flexibility and cost savings for your organization.

Eric Bruno
Managing Director, Co-Head of Corporate Origination
PNC Corporate and Institutional Banking, Asset Backed Finance
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