Bankers like the health-care industry for one simple reason: no matter what happens to the economy, people get sick. So far this year, the industry has raised more than $10 billion in syndicated loans, according to Securities Data Co. But one sector of the industry in particular, long-term care, is drawing bankers' attention for an equally simple reason: the baby boomers are getting old. Nursing homes, assisted-living facilities, and other health-care facilities and services for the aged are being snapped up at a record pace as a wave of consolidation hits an industry still largely made up of small regional chains and independent operations. Bankers say they held off on lending to the sector until last year's round of Medicare and Medicaid reform was resolved, since the two pay for most long-term-care patients. But now, they are climbing over each other to get to the key buyers. "From a financing standpoint, it's clear that as of the moment, the principal financing opportunities are being driven by strategic business M&A," said Douglas Braunstein, managing director and head of the health- care group at Chase Manhattan Corp. "And the most active sector from a strategic M&A perspective has been, generally, the health-care services side, and particularly as of late, long-term care." Witness one of the first megadeals in long-term care, brought to market this month: The leveraged buyout of Multicare Companies by LBO sponsor firms Cypress Group and Texas Pacific Group, in conjunction with Genesis Health Ventures, for which Citicorp, First Union Corp., Mellon Corp., and NationsBank led a $1.48 billion credit. "It's a consolidation play, basically," said Marijane Boyle, head of the health-care finance group at First Union Capital Markets. "You get regional dominance that allows you to contract to get synergies on both a purchasing and an administrative basis."
The pairing of financial buyers, like Cypress and Texas Pacific, with strategic buyers such as Genesis, is a pattern likely to repeat in long- term-care deals this year, said bankers.
Indeed, another such pairing, between GranCare Inc. and Apollo Management LP for the $1.78 billion acquisition of Living Centers of America, will be financed in a $1.3 billion one-stop-shopping deal led by Chase. "It's among our best examples of one-stop shopping. We are advising GranCare on the M&A front, and we're providing them with financing, leading both the high-yield and bank financing, and helping provide them with access to the private equity market, working to put GranCare together with Apollo," said Mr. Braunstein.
Banks are also finding financing opportunities among hospitals, with some of the year's largest credits financing acquisition of for-profit hospital chains.
Indeed, with the largest for-profit hospital chain in the country, Columbia/HCA, controlling only about 5% of the hospital beds, bankers say continued consolidation is inevitable. But that doesn't mean lending to the four or five largest hospital consolidators will be easy. "There's plenty of opportunities for acquisitions, but not necessarily acquisition finance, because (large hospital companies) have a multibillion-dollar line of credit which they can use, and they have tremendous cash," said James Emslie, managing director and group head of BankAmerica Corp.'s health-care group.
Services and products other than loans are the real key to financing hospitals now, said Mr. Emslie. "The whole way our game is played right now is really on idea generation," he said. "The way you're really going to install credibility in the relationship with the CEO or CFO of the company is to give them additional value besides just renting money to them."