May 11, 2006

1
Presentation to
MASSACHUSETTS LEAGUE OF COMMUNITY HEALTH CENTERS
Ike PapadopoulosDirector of Financing Programs

• May 11, 2006

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Capital Decision Making

• When you finance capital projects, you usually
  have 3 options
• PAYGO capital
• Taxable financing
• Tax-exempt financing
• Tax-exempt financing is usually the best option
  offering the lowest cost of capital with the best
  terms.

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Why Use Tax-Exempt Funds

• Better rates
• Interest paid on tax-exempt debt is exempt from
  federal income tax (and usually the income tax of
  the state in which the bonds were issued)
• The investor requires less interest to produce
  the same after tax return as taxable debt
• The differences in rates may vary but usually
  range from 2 to 3 percentage points less than
  taxable rates

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Background

• Federal Government granted states and local
  governments the benefit of not taxing the
  interest on their debt
• Therefore lower interest rates to state and local
  governments
• Not-for-profits provide public services that
  state and local governments would have to provide
  (e.g., healthcare, education, cultural resources,
  etc.)
• Therefore states decided to pass on the benefit
  of tax exemption
• State Authorities were established to have the
  authority to issue debt on a tax-exempt basis
  and loan proceeds to not-for-profits
• State Authorities such as HEFA are truly
  conduit entities no legal obligation to repay
  debt
• Authority staff is available to help borrowers
  throughout the process

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Possible Uses of Tax-Exempt Debt

• Finance new capital project
• Reimburse for prior capital expenditures
• Refund existing debt
• To reduce debt service
• To gain covenant relief

Note advanced refunding can only be done once
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I. Finance New Capital Project
Possible Uses of Tax-Exempt Debt

• Determine the eligibility for tax-exempt
  financing
• Eligible projects are those capital expenditures
  used exclusively by 501(c)3 organizations
• Ineligible projects include doctor offices, for
  profit sponsored research facilities
• Examine the project timing
• When is completion anticipated?
• What approvals/permits are needed?
• Can internal funds be used to finance initial
  stages, with subsequent reimbursement from bond
  proceeds?
• Is another stage of this project anticipated in
  the next few years?

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II. Reimburse Prior Capital Expenditures
Possible Uses of Tax-Exempt Debt

• Board vote must be in place declaring intent to
  reimburse project expenditures with bond proceeds
• Vote covers all prospective project costs
• Vote covers project costs incurred up to 60 days
  prior to vote
• Bonds must be issued for such purpose
• Within 18 months of expenditure, or
• Within 18 months of the financed property being
  placed into service

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III. Refund to Reduce Debt Service
Possible Uses of Tax-Exempt Debt

• A refunding could improve an institutions
  financial position if
• Current tax-exempt market rates are sufficiently
  lower than the rate on the outstanding debt
• Restructuring is needed to reduce annual debt
  service payments
• Covenant relief is sought
• An institutions credit has improved since the
  previous financing
• Current market perception of the credit sector
  has improved
• Existing covenants unduly hamper current
  operations

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Analyze Debt Capacity
Getting Started

• Compare financial and demand ratios to the rating
  agencies median ratios
• Examine operating dynamics
• Competitive position
• Cash available funds versus future needs
• Fund raising capability
• Impact of any planned projects/borrowing

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Determine Debt Structure
Getting Started (continued)

• Once the size of the project being financed and
  the credit strength and debt capacity have been
  analyzed, then consider options available in the
  tax-exempt market through HEFA
• Stand Alone Bonds
• Fixed rate
• Variable rate
• Pool loans
• Private placement
• Leases

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Bonds - Fixed Rate

• Lock in interest rate until maturity borrower
  pays interest and principal according to
  predetermined amortization schedule, usually 20
  to 30 years
• Principal may not be prepaid for 10 years
  (10-year call protection)
• For public sale, an investment grade, credit
  rating or credit enhancement will provide best
  price, i.e. lowest interest cost.
• Underwriter determines interest rates based on
  market conditions and investor demand
• For private placement, fixed rate is negotiated
  between investor and borrower
• Local banks recently active in this market

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Bonds - Variable Rate

• Interest rate adjusted periodically (daily,
  weekly, every 35 days, yearly, etc.)
• Borrower pays principal according to
  pre-determined amortization schedule
• Principal may be prepaid at any time with 30 day
  notice to investors bonds may be converted to
  fixed rate or other variable rate mode
• Credit enhancement from a highly-rated bank or
  insurer will offer best market access
• Options for variable rate structures
• Variable rate bonds have interest rate risk
• Interest rate risk may be hedged with swaps

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Fixed vs. Variable
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Pool Loans

• HEFA issues bonds for multiple borrowers, instead
  of a single borrower
• Loans are made from the proceeds of these pool
  bonds
• Transaction costs are shared among borrowers
• Loan size is typically 1 million to 10 million
• Variable interest rate on loans
• Access to pool loans depends on
• Borrowers credit worthiness as determined by the
  pool credit provider (bond insurer and/or letter
  of credit bank)
• Availability of funds in pool

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Pool M Program

• HEFA is currently working with two banks to
  provide credit enhancement for pool bond issues
• Bank of America
• Citizens Bank
• Other banks in process
• Pool M bonds sold as a weekly variable rate issue
  allowing borrowers to benefit from very low
  interest rates
• Interest on loans will be payable monthly
• Principal repayment of loans according to
  agreement with the bank
• HEFA subsidizing the costs of issuance in order
  to offer low up-front costs borrowers pay HEFA
  back over the term of the loan with a modest
  annual fee
• Each borrower individually negotiates with the
  bank the terms and fees associated with their loan

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Private Placement

• Identify investor (bank)
• Bank will provide term sheet which details
• Security features and covenants for financing
• Interest rate
• Variable rate or fixed rate and term and interest
  rate reset mechanism, if applicable
• Loan amortization period
• Term sheet
• Select financing team
• HEFA will solicit proposals for bond counsel, at
  request of borrower
• Engage borrower counsel and bank counsel
• Determine if trustee will be required

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Value Lease Program

• Tax-exempt financing for capital equipment
• Finance virtually any type of equipment,
  including energy-conservation or efficiency
  projects
• Cost-effective financing vehicle
• Low rates
• Competitive closing costs
• Process is fast and simple
• Standardized documents
• No meetings needed
• Close in 30 to 45 days

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Public Offering Process
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Steps Involved
1
2
Organizational Meeting
Initial HEFA Board Approval
6
4
5
TEFRA Hearing
Final HEFA Board Approval
Market and Price the Bonds
7
8
Closing Receive Proceeds
Invest Proceeds
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Flow of Funds
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Identify Members of the Financing Team

• Authority (HEFA)
• issues the bonds and loans the proceeds to the
  Borrower
• Borrower
• Not-for-profit institution eligible under HEFAs
  enabling legislation
• Investment Banker/Underwriter
• helps to structure the transaction and is
  responsible for selling/underwriting the bonds
• Bond Counsel
• assures that the bonds are a binding obligation
  of an institution and are tax-exempt prepares
  the security agreements and financing documents
• Authoritys Counsel (often the same as the Bond
  Counsel)
• assures compliance with statutory and
  constitutional law

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Identify Members of the Financing Team (continued)

• Underwriters Counsel
• provides legal advice to the Investment Banker as
  to the issuance and structure of the bonds and
  full disclosure of risks
• Borrowers Counsel
• assists the Institution in preparing full
  disclosure (Appendix A) and in the review of
  financing documents
• Trustee
• represents and protects the interests of
  bondholders
• Trustees Counsel
• reviews security agreements and financing
  documents to assure the trustees ability to
  perform its functions

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Develop Marketing Document - Official Statement

• Summary of financing structure, legal structure
  and information on the borrower
• Appendix A of the Official Statement contains
  disclosure of all material facts regarding the
  institution. Assembling Appendix A is the
  responsibility of the institution, with
  assistance from its counsel
• Typical areas of disclosure
• History of the institution
• Competition and service group information
• Current operations and any future plans
• Governance, administration and staffing
• Demand/utilization for previous 5 years
• Discussion of recent financial results and budget
• Outstanding and/or proposed debt

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Market and Price the Bonds

• The Official Statement is sent to potential
  buyers, typically one week prior to the bond sale
• Presentations are made to investors
• Demand levels set the interest rates
• Discuss preliminary pricing

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The Pre-Close

• Bond counsel prepares final opinion and
  transcript of proceedings
• Costs of issuance are confirmed
• Final Official Statement prepared and distributed

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The Close

• Counselors give their opinion that the
  transaction is legal, valid and binding
• HEFA, the institution and the trustee sign the
  security agreements and financing documents
• HEFA and the underwriter sign the Bond Purchase
  Agreement and the bond proceeds are wired from
  the underwriter to HEFA and then loaned to the
  borrower
• Bond proceeds held by Trustee and HEFA until
  requisitioned by the Borrower for eligible
  tax-exempt purposes
• Closing Dinner to celebrate successful Bond
  Closing!

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Overview of Mass. HEFA
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Introduction

• Established in 1968 with the sole mission to
  assist nonprofit institutions
• Largest issuer in the Commonwealth of tax-exempt
  revenue bonds for nonprofits
• FY 2006YTD, issued 1.3 billion, of which 850
  million was for healthcare
• Client base includes both large and small
  institutions
• HEFA has a team of 16 professionals

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Bond Financing Assistance

• HEFA will
• Work with borrower as part of the financing team
  to identify the most cost efficient financing
  method to fund capital projects
• Assist in solicitation of ratings and/or credit
  enhancement, as appropriate
• Review refunding opportunities for outstanding
  debt

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Bond Financing Assistance (cont.)

• Assist in the preparation of presentations for
  the borrowers credit profile
• Propose financing options when appropriate
• Assist with the terms of credit enhancement
• Actively review and comment on legal and
  disclosure documents

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Bond Financing Assistance (cont.)

• Provide comparable data and monitor pricing of
  the bonds and investments, if appropriate
• If desired, HEFA will prepare, send and review
  RFP for the selection of underwriter, swap
  advisor, trustee and printer
• HEFA will assist the borrower, when desired, in
  fee negotiations with all financing team members
  to ensure that fees will be reasonable and market
  based

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Selection of Legal Counsel

• HEFA has pre-qualified 5 bond counsel firms to
  ensure
• Experience and expertise and
• Clear and consistent legal documents
• The borrower may select a firm to serve as both
  bond and borrower counsel
• In such instances, HEFA reserves the right to
  hire its own counsel for a limited role
• All other counsel are selected by the borrower,
  underwriter, credit enhancer and trustee

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HEFA Board Approval Process

• HEFA has a 2 step approval process
• Initial approval based on preliminary information
  from the borrower
• Final approval following the substantial
  completion of documents
• Initial and final approval may be combined, if
  the deal is under a time constraint
• Approvals are granted at monthly Board Meetings

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Closing the Deal

• HEFA continues to be involved after closing
• Proceeds can be invested in the STAR Fund (The 7
  day average yield for the period ending 5/10/2006
  is 5.75)
• HEFA may be involved in processing requisitions
  for the project
• Available to answer questions regarding documents
  and covenants

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Contact Information

• Ike Papadopoulos
• Director of Financing Programs
• 617-737-8377
• ipapadopoulos_at_mhefa.org
• Mass. HEFA
• 99 Summer Street, Suite 1000
• Boston, MA 02110