| Why Engage an Independent Financial Advisor? |
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Planning and Development:
The FA delineates a list of Financing Alternatives by combining:
- the outcome of research on a variety of Client Factors, such as the client's goals, objectives, preferences, capabilities and environment;the application of First River Advisory's Financing Principles to the situation; and
a list of available and suitable Financing Products, which may be offered by a variety of parties. - Implementation: Once the Financing Plan has been adopted, the FA begins to marshal the resources that are essential for the successful implementation of the Financing Plan. One task is to assemble a financing team comprised of other professionals. In many cases, there will multiple vendors (investment banking firms, for instance), which offer the same Financing Product. In those situations, the FA evaluates competing proposals and recommends acceptance to the client. The FA performs many other tasks directly, and coordinates the efforts of others so that the financing timetable can be maintained.
These Financing Alternatives, along with the FA's analysis of advantages and disadvantages, costs, risks and implementation factors are discussed with the client's management, refined if necessary, and then presented to its governing board for action. The Financing Plan results from the client's governing board's selection of a particular Financing Alternative.
Engaging an Independent Financial Advisor has two main advantages to a health care organization:
- During the planning and development phase of an engagement, an FA is at liberty to consider all products offered by all vendors, in various combinations. The FA will eventually assist its client select the vendor which can deliver the required product(s) on the most favorable terms. The FA need not be limited to the products that it can deliver, or those which feature the greatest profit margin.
- For example, Arbor Hospice's 1997 bond issue featured a partial guarantee of debt service. In this case, the guarantor was associated with an investment banking firm which, as a quid pro quo, had to be appointed as the underwriter of the bonds. As Financial Advisor, First River Advisory had no disincentive to recommend the engagement of this investment banking firm in order to participate in the guarantee program.
- Mecosta County General Hospital (MCGH) examined proposals by several local banks to purchase the bonds directly, without the participation of an investment banking firm. An investment banking firm would have avoided recommending this alternative and calling into question its "value added." If MCGH had elected this financing approach, First River Advisory would have evaluated the competing bank proposals, first in the context of available alternatives, and, then, with respect to each other. Once a bank's proposal would have been accepted, First River Advisory would have represented MCGH in negotiations of terms, conditions and covenants.
- Except for rare cases, health care organizations engage investment banking firms to underwrite bonds on a negotiated, "best efforts" basis. A negotiated sale is a private sale of bonds to an underwriter without having advertised for bids. This could be disadvantageous to the borrower for the following reasons:
- No Commitment: Unless special arrangements have been made, there is no commitment by the investment banking firm to underwrite the bonds until a definitive bond purchase contract is executed. This event does not ordinarily take place until after the underwriter has had an opportunity to market the bonds and take orders from investors. An experienced FA's opinion as to the marketability of bonds is no less valid than an investment banking firm's opinion that is not backed up by a financial commitment.
- Competitive Sale Precluded: The borrower would forfeit the opportunity for its bonds to be offered on the basis of a competitive sale. A competitive sale is a new issue brought to market by having a number of underwriters competing to purchase bonds, with the winner determined solely by price. Provided that a sufficient number of bids can be generated, a process with which an FA can assist, there would be no doubt that the price paid for the bonds, and, therefore, the resultant yield, would be the best available.
- Two Sides of the Transaction: A borrower must recognize that a successful investment banking firm must also continually satisfy its "buy-side" customers. In a negotiated sale, the underwriter will propose a scale of yields that produces an overall price at which it is willing to purchase the bonds only after the bonds have been formally offered to its "buy-side" customers. How would a health care organization, especially an infrequent borrower, know that underwriter offers to purchase its bonds at the most favorable price? It would have to rely on evidence offered by the underwriter that the bonds were priced appropriately, for there is little unbiased information readily available to borrowers. The effect on a borrower of a five basis point mispricing of bonds maturing in twenty years is estimated by First River Advisory at $6,550 per million on a present value basis. Thus, the impact on a $25 million, 20-year bond issue would be over $160,000 in today's dollars. One of First River Advisory's most important functions in connection with a negotiated sale is the evaluation of the yields at which the underwriter proposes to purchase the bonds. In practice, First River Advisory's Shelley Aronson has adopted the policy of stationing himself at the underwriter's offices in order to observe the proceedings firsthand.
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