| How does First River Advisory assist clients in developing their Capital Plans? |
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Financing Principle #1, presented below, provides additional points for consideration in developing a Capital Plan.
Financing Principle #1
- Determine Optimal Level of Overall Indebtedness
- Target levels of indebtedness to be incurred within a relevant planning horizon should be established.
- A middle ground should be established between the "pay cash / avoid debt" approach to financing capital assets and a decidedly overleveraged situation.
- While national and regional ratios and other quantitative measures are frequently employed, setting a level of indebtedness remains more art than science, and is often dictated by an institution's individual circumstances.
- A high leverage ratio is more meaningful if the yield on the organization's debt is 9 percent than if such yield is 6 percent.
- Setting target levels of indebtedness should take into account the difference between indebtedness secured by general obligations, and that secured by specific real estate, dedicated revenue streams and similar forms of limited obligations.
The outcome of this process is a forecasted balance sheet that demonstrates the achievement of an appropriate mix of debt and cash and other financial assets.The Capital Plan must also mesh with the organization's Strategic Plan in order to address the "big picture." First River Advisory frequently employs the following two additional Financing Principles as a way to interject capital financing issues into the long-range strategic planning process.
Financing Principle #2
- Develop a Financing Plan Which Maintains Operational Flexibility
- The relative need for future operational flexibility should be an important consideration in examining capital financing options for projects sponsored by the various affiliates. For example, the operational constraints imposed by an FHA-insured mortgage loan will affect a nursing home far less than they will affect a hospital.
- Distinguish between corporate financing and project financing approaches.
- Structure financing arrangements so that a shift to capitated payment systems with respect to a significant percentage of the organization's revenue will not be inhibited.
- The organization should plan to borrow from positions of financial strength in order to maximize the choices then available and to preserve cash if needed during future periods of weaker financial performance.
- Capital financing options should be thoroughly investigated so that the organization will not encounter a "dead end" in the near future, when previous financing arrangements are either impossible or costly to unwind.
- Financing Principle #3
- Determine Appropriate Sources of Capital
- While an organization's ability to attract philanthropy to satisfy past capital needs may have been extraordinary, future fundraising campaigns should be approached cautiously. Philanthropy should not be considered a "bottomless well, and may become absolutely essential in the future if mainstream borrowing channels become closed.
- The organization should plan to take advantage of sources of credit ranging from local lending institutions to the national debt markets. The orientation of the approach will vary depending on the financing objectives and constraints.
- Because of its lower cost, long-term debt should be incurred on a tax-exempt basis whenever possible. Tax-exempt financing should be employed to the greatest extent feasible to preserve cash, philanthropic support and conventional borrowing channels for non-qualifying uses.
- Caution should be exercised in utilizing tax-exempt debt to finance assets which may become redeployed for non-exempt uses within five years.
- Whenever tax-exempt debt is to be incurred, the principal amount issued should be maximized to obtain economies of scale.
These Financing Principles often provoke vigorous and productive discussions among clients' governing boards, medical staffs and management.
Financing Principle #3
- Determine Appropriate Sources of Capital
- While an organization's ability to attract philanthropy to satisfy past capital needs may have been extraordinary, future fundraising campaigns should be approached cautiously. Philanthropy should not be considered a "bottomless well, and may become absolutely essential in the future if mainstream borrowing channels become closed.
- The organization should plan to take advantage of sources of credit ranging from local lending institutions to the national debt markets. The orientation of the approach will vary depending on the financing objectives and constraints.
- Because of its lower cost, long-term debt should be incurred on a tax-exempt basis whenever possible. Tax-exempt financing should be employed to the greatest extent feasible to preserve cash, philanthropic support and conventional borrowing channels for non-qualifying uses.
- Caution should be exercised in utilizing tax-exempt debt to finance assets which may become redeployed for non-exempt uses within five years.
- Whenever tax-exempt debt is to be incurred, the principal amount issued should be maximized to obtain economies of scale.
These Financing Principles often provoke vigorous and productive discussions among clients' governing boards, medical staffs and management.
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