These fundamental economic shifts have translated into significant changes in the way the largest ASC lenders do business. Three years ago, Citicapital, MarCap and CIT were the three primary lenders to our facilities. Both Citi and MarCap have been sold, and it is not clear at this time how actively their successor entities will be lending to our industry. CIT is no longer making new loans to ASCs. Senior executives from these three industry lenders migrated to new entities such as Siemans and Wells Fargo, which will hopefully become new mainstay lenders for the industry. Local lenders continue to be an option albeit more difficult to work with due to their limited knowledge of our business.
The result of these changes in both the national economy and the industry lending landscape has been fundamental changes in lending terms. A typical new ASC requires equipment costing $1.2-$1.5 million, tenant improvements costing $2.0-$2.5 million and working capital of $800,000-$1 million. Several years ago, a start-up ASC could finance their capital needs with 20-25 percent equity. Interest rates would typically be 7.5-8 percent for a fixed rate five year loan. Limited or no guarantees were required and loan covenants were minimal.
These terms have changed dramatically. Presently a new ASC requires 30-33 percent equity, an increase of $700,000 in equity for a transaction requiring $6 million in total capital. Interest rates have not changed significantly as base rates are actually lower, but this has been offset by increased spreads to the lenders. Guarantees have become mandatory, with new loans typically requiring 100-125 percent guarantees with a burn-off after two years if 1.25 times EBITDA coverage is achieved. Loan covenants typically include minimum net worth and debt service coverage as well as minimum cash positions.
Clearly the landscape has changed in favor of the lenders. Fortunately, well-structured transactions with solid sponsors still attract several alternative financing sources allowing the borrower some negotiating leverage. Times are tough, but the healthcare industry is one of the few areas where lenders are still active.
Mr. Karnes is CFO and co-founder of Regent Surgical Health, a leader in surgery center development, management and turnaround situations. Learn more about Regent Surgical Health.
