Debt finance

Debt financing and the evolution of the health market

A very positive trend for the financing of health infrastructure projects is the strong growth of institutional investments in the sector, including debt financing.

Siemens Financial Services recently reviewed the post-financial crisis landscape for financing technology-intensive projects across all sectors and discovered both positive and negative trends. Due to the post-crisis low interest rate environment, new lenders in infrastructure are keen to expand their portfolio, especially in healthcare where public-private partnership (PPP) structures are well established.

This includes institutional investors and specialty funds, both looking for long-term debt assets offering higher yields than corporate or sovereign bond markets.

That said, many of the newer institutional investors still struggle to properly price these projects – perhaps relying on banks to both originate, price and present deals, as well as take and hold large tranches. Of course, in the post-crisis environment, this has been a struggle for many banks.

While bank liquidity was available in Asia throughout the crisis and came back strongly in North America in 2012, it was not until 2013 that European banks showed a significant appetite for the financing assets of long-term projects.

And while such a comeback is good news for the sector, maintaining appetite is not guaranteed, especially given the regulatory changes looming after the crisis. Regulations such as Dodd-Frank in the United States and Basel III across the OECD can restrict banks’ appetite for allocating large amounts of capital to long-term debt. Indeed, many European banks are already downsizing their origination teams and looking to pursue a specialized model from origination to distribution, in which banks act as arrangers for a range of investors without adding significant risk. on their balance sheets.

Meanwhile, another important player has emerged: the internal funding arms of major technology vendors. In-house financiers have an attractive value proposition in the current climate as they are both highly liquid and highly motivated to invest in this sector to support their parent company’s sales and operations. And spurred by the changes currently taking place in the financing market, in-house financiers are expanding their role in healthcare financing.

Of course, internal financiers have been put in place for such a role – both to support technology sales and to help finance the value chain (including suppliers and buyers) using innovative financing techniques. . Yet recent stresses within the banking market have brought these roles to the fore, with potentially structural changes meaning they are unlikely to recede despite evidence of a return to liquidity.

It is not only as a lender that the role of the internal financier is expanding. Fairness is also necessary. Before the crisis, many health care projects achieved debt ratios of 9:1. Now some are approaching 3-4:1, although this ratio is also likely to improve as liquidity returns.

This is an area where in-house financiers can get involved, especially with early-stage investments that require the most equity. That said, the role of the internal financier is less that of a backing financier than that of a source of confidence for other potential investors.

Banks, venture capitalists, specialist funds and institutional investors are all encouraged by the fact that a major vendor’s in-house financier is willing to risk his own balance sheet to support his technology, which – due to his ability to evaluate his own kit – is a role that most are happy to play.

Certainly technology is a crucial part of many projects – not least because (particularly in healthcare, but also in energy and transport) much of the technology can be relatively new. An internal company’s commitment to its own technology is therefore an important ingredient, and is also linked to the establishment of new business models – such as new ownership or payment structures such as “pay per performance” or “pay per use” models which are also becoming more prevalent in health care PPPs.

Anthony Casciano is CEO of Project & Structured Finance – Healthcare and Leveraged Finance at Siemens Financial Services