The already small pool of lenders willing to finance hospitals and other health-care businesses has dried up amid the credit crunch.

Not only have health-care businesses struggled to tap the tight credit markets, but so have the lenders those businesses depend on for new capital or to refinance existing debt. With troubles of their own, fewer lenders are willing to take the risk of funding an industry beset with uncertainties, leaving hospitals that are already barely hanging on with fewer options and creating the potential for more consolidations or bankruptcy filings.

"Many lenders have exited the market," said Dean Graham, the president and chief operating officer of commercial lender CapitalSource Inc., which has a health-care lending unit. "The universe of companies that are lending today in health care is much smaller than it was a year ago."

Burned by their borrowers' financial troubles, banks and commercial lenders have shut off the spigot of easy money that flew freely just a few years ago. A wave of defaults has hit lenders' balance sheets hard. Like their borrowers, the lenders' own financial troubles have been making headlines. Most recently CIT Group Inc. and GMAC Inc., both of which lent to health-care businesses, have struggled.

"You're seeing the CITs of the world, the GMACs of the world, in significant amount of distress, needing government bailout funds," said Shane Passarelli, senior vice president with specialty lender Healthcare Finance Group Inc. "When you start seeing things like that, the pool of lenders is just significantly diminished, and the borrowers have fewer and fewer options."

Passarelli said it was common not long ago for seven or eight lenders to vie for the chance to provide financing to any particular health-care business. In the wake of the credit crunch, much of that competition has disappeared.

"Now I will see two or three serious competitors and one or two errant competitors who really are just putting out a proposal," he said.

Even before the credit markets seized up, few lenders chose to finance health-care businesses because unlike other businesses, they often do not own real estate or other tangible assets that can be used to secure the loans. Bankruptcy attorney Leslie Berkoff said that instead, many health-care financiers lend against hospitals' accounts receivable — essentially, the hospitals' right to collect outstanding bills.

Not only do many bills take a long time to collect, but some go uncollected. Add to the mix a heavy dose of uncertainty, given the government's right to recoup funds it's already paid out on behalf of Medicare and Medicaid beneficiaries, and Berkoff said many lenders simply are not willing to accept such risky collateral.

The uncertainty created a small pool of health-care lenders, but the credit crunch has eliminated some from the game.

"It is very complicated to lend on health-care receivables, and only those who truly have the experience and the understanding have remained in the market," said Berkoff, a partner at Moritt Hock Hamroff & Horowitz LLP.

Those willing to lend are also choosing less risky borrowers, imposing stricter terms to protect themselves and charging higher rates and fees.

"Lenders themselves start cherry picking and becoming much more selective," Passarelli said.

Passarelli said he was recently approached by a company seeking financing that usually would have accessed the bond markets.

"They really had the world at their feet," he said. "That's not the case anymore."

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