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5 Action Steps for In-Debt Surgery Centers

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Robert Carrera, president and CEO of Pinnacle III, discusses five action steps for ambulatory surgery centers struggling with debt.

1. Rearrange space if the surgery center is overbuilt.
One of the more common issues with surgery centers is overbuilding. Surgeons or developers forego a professional feasibility study and over-project potential patient volume during the planning phase, building too many operating rooms and purchasing too much equipment. These centers quickly find themselves with unmanageable debt.

"Some facilities are oversized or over-equipped because they were not planned properly from the beginning," says Mr. Carrera. "If the facility was designed for another group, it might encompass too much space for the current tenants. In this case, you could look at closing an OR but you are still stuck with the rent that goes along with it. Another option is to reconfigure the space to reduce square footage."

Reconfiguring extra space can be difficult and require upfront resources but may provide significant savings to the surgery center in the long run.

2. Bring on new partners or investors.
When the surgery center needs additional cash flow, it may be time to bring on new physician partners or even partner with a hospital or management company. An additional surgeon bringing cases into the center will raise case volume but also increase expenses and lower the percentage of ownership each surgeon claims. When the surgery center needs a quick injection of cash, bringing in a hospital or corporate partner is often the best bet.

"Look at your options for bringing in additional partners and reducing your capital from those partners to pay down the debt," advises Mr. Carrera. "You can also look at some type of partnership with a hospital or corporate entity to purchase a reasonably large portion of the center and use the capital obtained to pay down the debt."

If new partnerships aren't available, surgery centers can consider working with banks or private equity to borrow money.

3. Refinance the surgery center.
When surgery centers are underperforming and need to borrow money to get back on track, seek opportunities to refinance debt and spread the payments over a longer period of time. This is also a viable option for traditionally successful surgery centers that are having a difficult time meeting cash flow needs in today's economy or who may have taken out additional lines of credit.

"In this case, a turnaround plan is necessary to refinance the center's debt," asserts Mr. Carrera. "In some situations, looking for a large equity partner may be the only option. Look for a group that can assist you with the refinancing process and bring in some capital."

When you approach lenders about refinancing, you must relay why the surgery center was unsuccessful in the past and what you will do differently in the future.

"There is going to be an underwriting process that goes into the refinancing and you have to make the case for someone to refinance the center," says Mr. Carrera. "You will have to tell a positive story about what will change from now to the future that makes you a viable entity to receive the refinance."

Surgery centers financed before 2008 should think twice before refinancing. If you initially received non-recourse financing, existing partners may not be interested in guaranteeing the debt of the center going forward and you may have to consider keeping that deal instead of entering into a new one. "Refinancing an older center with debt on it might not make sense because the terms of the note beyond the interest rate are likely to change," says Mr. Carrera.

4. Renegotiate existing contracts.
Surgery centers may find that renegotiating existing managed care, materials and building lease contracts provide them with better deals than they currently experience. Renegotiating contracts can be undertaken before seeking refinancing or cited as one of the steps to take after the refinancing is complete.

"The ability to renegotiate managed care contracts and bring in additional cases or specialties will add promise to the center," says Mr. Carrera. "The ability to renegotiate the building lease will assist the surgery center in becoming cash-flow positive."

Even surgery centers that haven't considered refinancing in the past are able to take advantage of the low interest rates available today and focusing on contract renegotiation is a great way to jump start that process.

"Lenders want to hear about what happened in the past and what changes need to take place to make the surgery center profitable going forward," says Mr. Carrera. "It is important for them to take a look at your previous performance, determine how that will transfer into the future and assess your future projections."

Renegotiating lease contracts will likely include personal guarantees. Some surgery centers may have avoided that in the past but they are becoming unavoidable today. "Personal guarantees are pretty much the way things are now," notes Mr. Carrera. "They maintain everyone’s interest in the center because they all have skin in the game. Older centers built prior to 2008 may have been financed with no personal guarantees and if you choose to refinance, there will be personal guarantees going forward."

5. Accelerate debt payment.
Accelerating debt payments are an option for some surgery centers, but the paying down of principal doesn't benefit the surgery center from a tax standpoint. Have a clear plan to follow when accelerating debt payments and work with an expert to optimize this opportunity.

"Even if surgery centers are making accelerated debt payments, they are still taxed on funds used in paying the principal on the note," says Mr. Carrera. "Projections need to be undertaken on centers doing well to make sure distributions are going to be adequate enough to cover the tax liabilities going forward."

For centers with low debt interest rates, it is important to consider whether accelerating debt is a good option or if refinancing would be better.

"Some centers want to refinance their debt and keep it at the low interest rate while others, citing the potential uncertainty of the future, would rather reduce their overall debt load," relays Mr. Carrera. "Just be aware that taxable income needs to be considered if you are looking at making more aggressive payments."

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