Tom Salemy, CFA, CAIA
This week’s chart compares non-profit health care organizations’ (“HCOs”) cost of debt versus their size. The chart illustrates the financial characteristics of 630 HCOs divided into quartiles based on borrowing costs measured by option-adjusted spread1 (“OAS”). The HCOs examined show a wide dispersion of borrowing costs. Top quartile HCOs have an average OAS of 0.76%, while bottom quartile HCOs have an average OAS of 3.69%.
Looking at the data, there is a clear positive correlation between an HCO’s size, as defined by revenue and assets, and its OAS. Higher revenue and more assets appear to equate to lower borrowing costs. In addition to revenue and assets, average days cash-on-hand is a financial metric commonly used to assess HCOs financial health. The table illustrates that a higher days cash-on-hand metric typically, but not always, translates into lower borrowing costs.
It appears that while days cash-on-hand is an important determinant of an HCO’s financial health, an HCO’s size, as defined by revenue and assets, is the primary determinant of borrowing costs. If size continues to be the main determinant of HCOs borrowing costs, we would expect to see smaller HCOs continue to merge with larger peers.
1The option adjusted spread is the spread over U.S. Treasuries that would discount a bond’s future cash flows back to its current price.
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