Current Funding Environment
As expected, after 10 consecutive monthly increases the Federal Reserve opted last week to hold the Fed Funds rate constant at a 5.00% - 5.25% target range. In post-meeting comments, Fed Chair Jerome Powell suggested that the new plan is to let some time to pass to allow for the fuller realization of prior direct and indirect tightening initiatives. Powell also noted that “it may make sense to move rates higher but to do so at a more moderate pace.” While Fed actions will continue to reflect whether key inputs suggest headwinds or tailwinds to the inflation battle, it seems that we are squarely in the phase of competing Fed priorities. Expect continued market volatility.
|
1 Year |
5 Year |
10 Year |
30 Year |
|
|
June 23—UST |
5.23% |
3.99% |
3.74% |
3.81% |
|
v. June 9 |
0.03% |
0.07% |
0.00% |
-0.07% |
|
June 23 –-MMD* |
3.03% |
2.60% |
2.53% |
3.46% |
|
v. June 9 |
-0.04% |
-0.06% |
-0.06% |
-0.04% |
|
June 23—MMD/UST |
57.93% |
65.18% |
67.72% |
90.79% |
|
v. June 9 |
-1.10% |
-2.68% |
-1.53% |
0.58% |
|
*Note: MMD assumes 5.00% coupon |
||||
SIFMA reset this week at 4.18%, which is approximately 81% of 1-Month LIBOR and represents a 134 basis point adjustment versus the June 7, 2023, reset.
The Makeover and Simultaneous Management
Ken Kaufman shared his most recent blog post titled “America’s Hospitals Need a Makeover.” It covers the array of things hospitals need to work on, but one of its most important underlying points is that executive teams must shift to multivariable management. We’ve noted before that there are a lot of very smart people working on component problems within each of the operating, financing, and investing verticals of the typical not-for-profit healthcare organization. But the roster of today’s challenges is so diverse, interconnected, and relentless that the traditional playbook of transactional, or vertical, or sequential management won’t work. We are in a “no haven” period where every part of the healthcare finance equation carries the seeds of disruption, and the best response is grounded in simultaneous and tightly integrated efforts across four areas:
- Financial and Capital Planning: This remains the heart of managing the operating company and its ability to generate the internal and external capital resources needed to meet its mission imperatives. Every financial and capital plan should focus on addressing four core questions:
- How much profitability?
- How much capital?
- How much cash?
- How much debt?
- Performance Repositioning Plan: This captures the array of initiatives that enhance the financial and capital plan by either optimizing resource generation or repositioning resources into a more effective form. Any repositioning thread should focus on three core questions:
- How can we optimize current revenues, and can we materially diversify our revenue channels over an acceptable period?
- How can we restructure the expense base—especially our workforce—to align with current revenues and to anticipate additional resource constraints, and can we create a more flexible expense base?
- Are our current resource pools such as real estate holdings, service lines, operating business, etc. in their best form or are there strategies that might reposition these resources into a more useful form?
- Risk Management Plan: This identifies the greatest pressure points to the baseline financial and capital plan and what they mean for both risk management priorities and balance sheet positioning. Any risk plan should focus on three core questions:
- What is the roster of risks that represent the greatest threat to financial performance over the next 3 – 5 years and the magnitude of the exposure?
- Are there any commercial hedges, performance improvement initiatives, or other management interventions that can fully or partially mitigate these financial exposures?
- What is the resulting net exposure that should be taken into consideration in constructing a responsive balance sheet plan?
- Balance Sheet Management Plan: The identification of a responsive balance sheet—meaning one that is built to meet the opportunities and challenges confronting the operating company (so designed to wrap around the financial plan, the performance improvement plan, and the risk management plan). Any balance sheet plan should focus on three core questions:
- How much liquidity and in what form (funded cash versus lines of credit)?
- How much risk in the debt and investment portfolio given the total organizational risk capacity and the level of residual risk (unhedged or unmanageable) in operations and strategy?
- How much return might be available from the deployment of balance sheet resources assuming we prioritize resource-risk balance or tolerate some level of intentional imbalance?
In a more settled time, it might be possible or even advantageous to tackle these initiatives sequentially or on a unit basis, but incremental management won’t work this time around because each step is equally critical, and each step must feed on and support the others. Debt issuance and operating cash flows are well below historical norms, such that many healthcare organizations are spending down balance sheet reserves to fund capital or close cash flow gaps. This means that the composition of resources, capacities, and vulnerabilities is changing rapidly. Successfully answering one of the questions above won’t address the larger problem; while optimizing revenue and expense—margin recovery—is critical, it is a mistake to assume this should be done without putting in place a parallel and connected balance sheet strategy. The goal is balance between resources and claims or intentional and tightly managed imbalance, and this only happens by dynamically connecting operation and balance sheet plans. This is managing to the “interdependencies, interactions, and intertwined effects” that Ken references.
Note to readers: We’ll be taking a summer break in early July and will be back in touch with you later in the month.
