Storm of Financial Woes Brings on Credit Crunch for Providers

ATLANTA–The fallout from the nation’s tanking economy is,
at least initially, taking the form of a credit deep freeze for
home medical equipment providers, but those who are prepared can
weather the financial storm, industry experts said last week.

In recent weeks, financial institutions of every stripe have
collapsed or been taken over, stocks have plummeted, home
foreclosures have skyrocketed and, as of Friday afternoon, Congress
and the president were still battling over whether or not to
approve a $700-billion bailout.

“It’s not clear to me that we can determine yet how
this is going to roll out for the HME industry, but I think there
are some real ramifications,” said Dexter Braff, president of
The Braff Group, a merger-and-acquisition firm in Pittsburgh, Pa.
“Things are very fluid, but right now, at the end of
September, credit is nearly frozen. Even financing that is
abundantly safe, where interest rates are consistent with the
underlying risk that banks would be taking on, even those loans are
being scrutinized and often not being given.”

“Lenders,” he added, “are just
paralyzed.”

“This is likely to be very much like Monopoly–when
you’re out of cash, you’re out of the game,” said
Wallace Weeks, founder of Weeks Group, a strategy consulting firm
in Melbourne, Fla. “Heretofore, in normal conditions, when
you’re out of cash you may be able to raise it somewhere. As
it stands today, even the bank the borrower deals with is unable to
go anywhere to borrow money. So when a bank can’t go anywhere
to borrow money, that’s pretty bad. And that’s the
situation we have.”

The credit freeze could ultimately affect HME mergers and
acquisitions, HME leasing companies, lines of credit and at least
the cost, if not the availability, of insurance for providers, said
Dennis Santoli, president of The Campania Group, a specialty health
care insurance company based in Vienna, Va.

He noted the brunt of the financial fallout will be felt by the
larger companies and manufacturers that often rely on commercial
banks for various types of funding.

“The smaller you are, the better off you are right
now,” Santoli said.

Still, some impacts are already being felt, while others
loom.

“There’s definitely an effect on mergers and
acquisitions,” Braff said, adding that buyers are already
having a hard time finding financing for such deals. “The
ability to get credit–acquisition financing, things of that
nature–at virtually any price is very difficult.”

While the M&A market hasn’t dried up–“We just
closed three deals this week,” Braff said–“many of the
acquisitions are being done by strategic buyers with cash that has
already been secured or acquisition lines that have already been
secured.”

Lines of credit could also be problematic because providers
often rely upon them to purchase equipment or meet the payroll as
they wait for payment from Medicare or other payers.

“Those companies that have lines of credit outstanding,
we’re hearing that a lot of credit lines are being frozen or
restricted or reduced, so the consideration of cash flow might be
more troublesome,” Santoli said.

“You might be surprised if your line of credit comes up
for renewal [as to] what the terms are,” Braff said.

Another worry is insurance for providers.

“The bar will go up because of the AIG failure,”
Weeks said, referring to the crash of the giant insurance company.
“Some insurance coverages are required for providers to be in
business. If they can’t get those coverages, they can’t
be in business.”

Providers, he said, “need to be forward-thinking and get
the levels of coverage they’ll need next year this
year.”

While Santoli doesn’t think there will be “an
overwhelming impact” on the availability of insurance for
most HME providers, he does believe all insurance companies will
likely have to raise their rates sometime in the future.
“Because the availability of capital has gone down and
insurance companies will have to make some adjustments to their
balance sheets, it will, over time, accelerate the rise [of
insurance costs],” he said.

Weeks said one of his concerns has been leasing companies that
also rely on credit to purchase equipment, which providers then
rent from the leasing company. “If the leasing company
can’t get money from a bank, how is it going to fund
equipment purchases?” he asked.

Santoli, too, said that could be a problem. “A lot of
people do installment leasing. If they want to go pick up new
equipment, they’re going to have a problem unless they have
cash,” he said.

Cash is going to be king in this new environment, according to
Weeks, and the companies that fare the best will be those with
plentiful cash, he said.

“Industry participants need to give their attention to
setting in place for their company’s cash management policies
and procedures that ensure they will not run out of capital,”
he said.

He suggested that providers put together a rolling cash forecast
that extends at least six months out. By ascertaining accounts
receivables and the rate they are being collected, billed or held
revenue, equipment purchases, sources of cash and uses of cash
month by month, companies can figure out their net cash position
over time.

“If it reveals that the cash is less than management is
comfortable with, then they need to create a remediation
plan,” Weeks said. “That remediation plan would be
that, ‘Maybe we need to put some extra effort into collecting
or reducing [days sales outstanding] or the held revenue or to
reduce purchases, expenses’–some plan that gets cash back up
to an appropriate level in that forecast period.”

The idea, he said, is to look at your cash position far enough
out so that you can take action when a problem is spotted.

Weeks added another caution: Manage your growth. “Part of
keeping the cash is not letting growth consume the cash, because
there is likely to be no ready source of capital.”

Along those same lines, Braff advised providers to check out
their lines of credit with their bankers.

“If you have lines of credit and they are getting ready
for their annual renewal, talk to your banker now,” he said.
“You want to find out if you’re going to be cut …
If I had a line, I’d be checking with my bank, and if it is
extended, what are we looking at. If they are going to reduce it by
25 percent, I’d like to know that now and take some action to
avoid a shortage of cash.

“Clearly,” he added, “any prudent person right
now would be considering cash in a more deliberate manner than the
past. You can control that. So why wouldn’t you?”

As frightening and dire as the economy might look right now,
“it’s not Armageddon,” Braff said.
“There’s a troubling problem: Debt is frozen.
That’s bad, but the deep freeze will begin to thaw probably
pretty quickly. We won’t get back to where we were with
liberal debt, not for some years. But there’s no need for you
to hang yourself from a Hoyer lift.”

The HME industry is a resilient industry, Braff continued.
“Healthy businesses will be able to bridge this gap and
continue to function. It’s going to be tricky, you will have
to be creative, pay more interest and work with your vendors, but
it’s not like a [healthy] company will just go
under.”