Tax exempt bonds - Coursework Example

Access to capital is critical to keep facilities current, add major information technology systems and strengthen quality initiatives .Debt financing is a major source of capital for health care organizations. Cost of capital is a major determinant of the type of debt financing. Bond issuing is one option of debt finance that health care organization can use to finance their projects. For financial and capital planning to be effective, hospital leaders, including chief executive officers, chief financial officers and board members, must be aware of the changing conditions of the capital markets and the types of capital available.

The types of debt financing include tax-exempt and taxable bond offerings and such nontraditional debt offering as off-balance sheet options and participating bond transactions. A sound financial plan should include maintaining a strong equity portfolio and managing debt to minimize cost and maximize access to capital. The following steps allow hospitals to effectively incorporate debt financing as a component of their strategic and financial planning process. 1.  Building a financing team:  Building a knowledgeable financing team is the primary responsibility of the CFO.

The team should be responsive to variations in the financial market including changes in interest rates, regulatory requirements and ratings activity, among other things. The team should include members from outside the organization, such as legal counsel, underwriters, auditors, financial advisers, bond issuers and bond trustees. 2.  Active management of debt and equity portfolios:    Hospital financial leaders must actively manage debt and equity portfolios to account for changes in the financial markets and the organization’s financial performance.

Senior leaders and the board should be kept abreast of the organization’s financial performance, including the organization’s capital outlook. 3.  Evaluate debt capacity:   Debt capacity is the amount of debt an organization is able to sustain within its credit rating profile. The ability to incur debt is a sign of an organization’s financial strength. Determining debt capacity will help organizations strategically allocate capital and also help calculate how much capital they need to obtain from other sources. 4.  Determine the appropriate mix of debt and equity financing:   Determining the appropriate mix of debt and equity financing is a complex process which is accomplished, in part, by assessing the organization’s debt capacity, the level of risk the organization is willing and able to accept and rating agency benchmarks.

Financial leaders must determine the appropriate mix of equity and debt financing, including the appropriate mix of traditional and nontraditional debt, to secure the maximum amount of capital at the most favorable rates. 5.  Calculate the appropriate rate mix for debt:    Calculating the appropriate mix of fixed rates and variable rates is an important component of a hospital’s strategic financial plan. The appropriate mix is influenced by the organization’s bond ratings, availability of free cash and bond insurance, interest rates and willingness to accept risk.

Fixed-rate debt is secure and becomes part of an organization’s capital structure until it matures. Variable rates are historically lower than fixed rates, resulting in savings to the organization, but carry no guarantee over time. Variable-rate debt is subject to changes in interest rates, regulatory activity and an organization’s credit rating. 6.  Diversify variable-rate debt:    Variable-rate debt can take different forms. They include variable-rate demand bonds and insured and uninsured auction rate securities,