The Massachusetts Health and Education Facilities Authority and General Electric Medical Systems have combined forces in a new financing that allows small, embattled hospitals to buy the most advanced medical equipment.

At the instigation of General Electric Medical Systems, the state authority privately placed a $1.1 million bond issue with GE Medical to lease and buy the latest in radiography and fluoroscopy equipment.

The deal's innovation is that the bonds were sold right back to GE Medical, obviating the need for credit enhancement and significantly lowering debt service costs.

"There's no question that there's going to be increased demand for this kind of financing," said Edward M. Murphy, executive director of the Massachusetts authority. The Bay State is a particularly appropriate environment for the deal, he said, because the economy severely depressed local banks' letter of credit ratings.

"A number of small financings are now more difficult to do because of the absence of secondary credit support," Mr. Murphy said. "When the banks' ratings went in the tank, credit enhancement became either unavailable or prohibitively expensive.

"The refinement that GE has brought," he added, "is that they put the equipment provider and the financing provider in one package."

Jeffrey Hollister, manager of field marketing at GE Medical, said the program eventually could spread to 25 states. "We're trying to develop a strategy on a nationwide basis." Mr. Hollister said. "Any state that has a health-specific statewide authority could qualify."

Martin L. Rainford, general counsel for Massachusetts HEFA, said the financing "fills a gap" in the traditional method of raising money for hospitals. Pooled borrowings are more expensive -- thanks to disclosure-related and underwriting costs -- and more time-consuming, Mr. Rainford said.

"There's only one prerequisite," he said. "The hospital has to make a reasonable decision to purchase GE equipment first. Once done, it offers the best deal for the small hospital."

The deal was sold for Mercy Hospital in Springfield, Mass., and a hospital in Wellesley, Mass., reportedly is being considered for the same financing. Mr. Rainford said the authority had received no other applications. The private placement was first reported in Modern Healthcare magazine.

Mr. Rainford said GE Medical sells about $30 million of equipment annually in Massachusetts. Other large industrialized states such as New Jersey are being considered for the same structure, according to officials at HEFA.

The private placement is priced at 50 basis points over the three-year Treasury note, or about 6.11%. The ideal, maturing in five to seven years, actually comprises several contracts; as each shipment of equipment is delivered, the borrowing cost is set by that day's three-year note rate.

GE Medical installs the needed equipment in exchange for the institution's pledge to pay debt service for the term of the loan. Douglas W. Stiles, vice president of fiscal affairs at Mercy, said the transaction allowed the hospital to quickly acquire two radiographic and flouroscopic machines, a software upgrade for its computerized tomography machine -- which allow x-ray pictures to be analyzed in greater detail -- as well as a portable x-ray unit.

The best aspect of the bond sale, however, was the absence of credit enhancement, Mr. Stiles said. GE was comfortable with the deal, he added, because of a long-term relationship. "We've done business with them for more than 20 years, so they had a pretty good sense that we would pay," Mr. Stiles said. "And as I recall, they reviewed our financial statements."

From GE Medical's perspective, the deal allows it to sell high-priced equipment in the midst of a tenacious recession. Consequently, part of the attraction to the Mercy Hospital structure is a "master agreement" that can be replicated for other financings with the Massachusetts authority.

"The whole process here is to derive incremental equipment sales," Mr. Hollister said.

When applying the same structure to other states, he added, the master agreement will have to be altered to suit the state agency involved. Furthermore, credit enhancement may have to be used in the future depending on the health of the particular hospital.

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