1. A longer process
In an ideal market, Mr. Walker says the physicians or the group involved in the surgery center start-up or acquisition — the borrowers — would contact several banks — the lenders — early in the process. After evaluating the proposals from the lenders, the borrowers select which lender they would like to work with and are then sent a term sheet or commitment letter from the lender.
Once signed, the borrowers then enter into draft negotiations with the lender. Finally, when an agreement is made, the borrowers sign the final loan documents.
This process, which used to take anywhere from a few weeks to several months, is now taking considerably longer for ASCs in the current market due to a variety of reasons.
“Lately, lenders have been scrutinizing everything more carefully,” Mr. Walker says. As a result, each step of the loan process requires more time than it had in the past.
2. Increased scrutiny for a “specialty subsector”
The increased scrutiny of lenders means that it is taking longer to get term sheets and commitment letters approved by their credit committees. Although industries across the board are experiencing this similar phenomenon, “ASCs feel it more acutely because it’s such a specialty subsector,” Mr. Walker says.
For example, many unique business relationships occur in ASCs. “If you are dealing with lenders who don’t fully understand the business, they may feel less comfortable with certain more traditional loan terms,” Mr. Walker says.
The changing nature of physician ownership in ASCs is one of these terms. Many loans prohibit individual physicians or guarantors from selling their ownership in the borrower entity, so that if one leaves or is no longer a borrower, the borrower entity is in breach of the agreement, according to Mr. Walker. However, due to the nature of the surgery center setting, physicians who were original guarantors may retire or move to other regions. At the same time, other physicians come into the practice to take the place of those original guarantors who left.
“This doesn’t affect the overall operation of the center,” Mr. Walker says. “A general commercial lender doesn’t usually come across a situation like this.” He suggests that it is important to educate lenders about these types of situations early on in loan negotiations. This way, lenders can have a better understanding of what type of business an ASC is, thereby cutting down on negotiations, misunderstandings and reducing the time it takes to get to closing.
3. Legal opinion letters
More lenders are requiring legal opinion letters from the borrowers’ attorneys, according to Mr. Walker. “This is a letter from the borrowers’ attorney that says, among other things, that the loan documents are legally binding and enforceable against the borrower parties,” he says.
Historically, he says, these kinds of letters were not seen for most loans under around $10 million. Now, due to the current market, banks are asking for more assurances when they lend money, and they are frequently asking for opinion letters.
“They act as an extra assurance policy or ‘stamp of approval’ for the bank,” Mr. Walker says.
Drafting these letters takes additional time for the borrowers’ attorneys, therefore adding not only time but additional legal fees. “It can get really expensive really quick,” Mr. Walker says.
However, this added cost depends on what the banks are asking of the attorneys. “Any law firm of any size usually has a form opinion letter and a committee to review it,” he says. “Expenses can add up because it takes time to go back and forth between the attorney’s office and the bank.”
The good news is that usually only a single attorney represents the group acquiring the loan for the ASCs. “We represent all of the physicians or owners of the ASC collectively,” Mr. Walker says. “Sometimes, physicians can have competing interests, and they may want to separately engage outside counsel, which is fine too.”
4. A higher cost for ASCs
As a result of the extended loan process, legal fees and loans have become more costly for ASCs that are looking to take out a loan. Mr. Walker estimates that closing costs have increased 25-50 percent in some cases over what they had been in the past. However, lenders are still willing to make loans to very credit-worthy borrowers, he says.
Also contributing to higher costs is the additional time and money the borrowers have to spend on other professionals aside from attorneys. According to Mr. Walker, this includes administrators, accountants and financial advisers.
5. More guarantors required
The increased scrutiny of loan agreements by lenders has resulted in many lenders requiring more responsibility by and information on the guarantors of the loan.
“Higher levels of personal guarantees have been required recently,” Mr. Walker says.
In the past, physicians entered into pro rata agreements on loans, meaning that they were responsible only for the percentage of the ASC that they owned. In the present market, some lenders are requiring all of the physician partners or personal guarantors involved in a transaction to be responsible for the entire debt, according to Mr. Walker.
Sometimes this arrangement requires physicians and other guarantors to disclose a good deal of their financial information, including personal information, to the lender.
6. More documentation required
In what Mr. Walker calls one of the “most onerous” stages of the loan process, more banks are requiring the signature of every guarantor on the loan. “In other words, lenders today are less willing to close without 100 percent of the signatures,” he says. In the case of ASCs, this means every physician-owner must sign some or all of the final loan documents.
“Banks are less willing to fund ASCs without having everything documented. They are less willing to waive certain conditions to closing, such as missing signatures,” he says.
The future of loan closing costs
Although many people are still willing to jump through these hurdles to acquire loans, Mr. Walker notes that the additional hassle has led many ASC groups to decide to look into other means of financing their center.
“If an ASC is on the fence whether or not to get a loan to finance new equipment, for example, or to fund it on its own, more have decided to use distributions to get the equipment,” he says. “The added time has many saying, ‘Forget it. We’ll fund it with cash.'”
Mr. Walker sees the market beginning to bottom as the economic situation begins to stabilize. However, he notes that restrictions and regulations will be tight for the foreseeable future.
“Ultimately, the market will normalize,” he says. “People will realize which lenders are more stringent when it comes to loans, and it will be to the lender’s advantage to ease up some.”
In the long run, Mr. Walker says that it is still possible for ASCs to access loans in the current market. He says ASC must remember that the process will take much longer than it had in the past and that there are few more obstacles in the path than there were before. “It’s not unbearable or impossible, unless you aren’t prepared for it,” he says.
