Known in the health care industry as the pioneer of physician practice management, PhyCor Inc. is a company banks are lined up to work with.
Nashville-based PhyCor operates 47 clinics in 27 states and manages associations with more than 15,800 physicians in 23 markets. Founded in 1988 at the dawn of the "managed care" movement, PhyCor negotiates with health maintenance organizations on behalf of doctor groups and handles administration and billing for them.
Since its initial public offering in 1992, managed by Alex. Brown & Co., the company has issued new securities annually, the most recent of which was its $210 million common stock offering in March, also managed by Alex. Brown.
Citicorp was the lead lender on PhyCor's first, five-bank facility, a $50 million credit that has been revised six times, and now stands at $400 million, including term, revolver and 364-day facilities. The company's bank group has grown to 20 institutions in its current facility, still led by Citicorp, including NationsBank Corp. and First Union Corp.
John Crawford, chief financial officer of PhyCor, spoke with American Banker about health care lending and the corporate finance market.
Have banks offered you "one-stop-shopping" financings?
Yes, and I think increasingly we'll see that, with the combination of Alex. Brown and Bankers Trust and BankAmerica with Robertson Stephens.
As a result of our Alex. Brown relationship, we invited Bankers Trust into our current facility. We probably wouldn't have without that relationship. We also invited BankAmerica. We probably would have done that even if they hadn't bought Robertson Stephens, but that certainly was an added factor. We're open to their bundling of products and multifaceted relationships.
What is the appeal of one-stop shopping to PhyCor?
Hopefully, it should reduce the cost of capital. That's the ultimate reward for a corporate finance guy. And by knowing us better and being able to offer us products and solutions that help accomplish that objective, I think these banks will be serving a purpose.
Would PhyCor do a complete one-stop transaction?
Not likely. I think there's some risk of putting all your eggs in one basket. If the economics became compelling, I think that would be a potential, but I don't think it's likely.
We'll continue to sponsor multiple relationships, with each organization bringing to the table different strengths and weaknesses. Hopefully what you wind up doing is taking advantage of the combined strengths.
What other advantages could you find with a one-stop?
If we wanted to do a $400 million acquisition and didn't want anybody to know about it, I'd very much like to have a one-stop opportunity to get that deal done.
But realistically, companies are going to keep multiple relationships in order to keep some kind of healthy dynamic as far as pricing issues go.
Have your financings been priced to your liking?
I think our credit has been very aggressively priced, probably over the last two years. Early on, when I first took this role, our credit was too expensive, and it took a while to convince the banks that they were charging us for risk that was inappropriate.
Over time, they grew to realize that, and they've given us very good pricing over the last two years at least.
And on the equity transactions, you'd always like to pay a lower gross spread, but I'd say, compared to the market, we've done well.
What was the impact of this June's Standard & Poor's debt rating upgrading, to BB-plus from BB, and the BB-plus bank loan rating?
It certainly reinforced the bondholders, who bought the bonds thinking they were underrated and their decision was affirmed. It's also further demonstrating to the marketplace our continuing improvement in our credit horizon. I'm hopeful that soon this company will be investment-grade-rated, and we're constantly moving in that direction, based on our desire to lower our cost of capital.
Have your banks helped you in your pursuit of investment-grade ratings?
We're already getting investment-grade pricing, if you look at what the banks are charging us. This latest amendment to our revolver provided for the company to become an unsecured creditor to the banks. That's a major step in the effort to become investment-grade-rated, so I think they've been very helpful and will continue to be helpful in doing that.
What has caused PhyCor to end a bank relationship?
It's a fairly broad basket because we've done it on a couple of occasions. Just acting in a way that's not in the best interests of PhyCor.
Let's say you're a member of a bank group, and you try to command the control of certain decisions made by the company, threatening to revoke the credit if the company doesn't behave in a certain way. That's very dictatorial and not very relationship-oriented.
We've seen situations where financial institutions try to dictate terms because they believed they had the leverage to do that. Frankly, we would have done just about anything other than give in to them on those kinds of terms. We called their bluff, and they discovered they didn't have the leverage, and in effect, they no longer have a relationship with the company.
What does PhyCor want from banks it hasn't found yet?
Some of the EDI (electronic data interchange) and EFT (electronic funds transfer) functions that they're entering into are going to be very exciting over time.
Especially for an organization such as ours that has so many independent checks clearing at the field level. Somebody that can help automate that function would certainly be adding a lot of value.