S&P - Public Finance Criteria (2007). - The Global Clearinghouse

Physician Groups And Faculty Practice PlansStructural featuresStructural features are focused on addressing twomain concerns: (1) whether a healthy obligatedgroup’s assets may be subject to substantive consolidationin bankruptcy in the event of insolvency ofthe parent or non-obligated entities; and (2)whether the parent may have the ability to causethe subsidiary to file itself into bankruptcy.Moreover, the structure of a “ring-fenced” subsidiaryshould have mechanisms in place restrictingthe ability of the parent to siphon off assets or burdenthe subsidiary with liabilities. In structuredfinance, these concerns are partially addressedthrough the use of a special purpose entity (SPE)subsidiary. It is conceivable that some of these featurescan be applied to senior living 501©(3) organizations,including:■ The incorporation of each obligated group facilityinto a separate 501©(3), special purposeoperating entity (SPOE). A special purposeoperating entity is not a bankruptcy remoteentity, as that term is traditionally used in structuredfinance transactions, although it doesshare some characteristics);■ The creation of a duty of the board of directorsof the special purpose operating entitytowards the residents of the senior living facilityin question (this should be consistent withthe charitable purposes for which the 501©(3)was established);■ Provision of a non-consolidation opinionbetween the parent and the special purpose operatingentity, where appropriate;■ “Independent director” on each SPOE board,unrelated to or affiliated with the parent whosevote is required to file the facility into bankruptcyand to approve contracts, notes or other obligationswith the parent.CovenantsCovenants are often offered as a means to justifyratings separation, particularly protective covenants(designed to limit transfers of assets) and the nonpetitioncovenant (in which the parent undertakes notto file the subsidiary into bankruptcy). Standard &Poor’s view is that in and of themselves, covenantsdo not sufficiently insulate a subsidiary from its parent,but a tightly drafted covenant package isdesired, including but not limited to:■ Negative pledges.■ Nonpetition covenant.■ Restrictions on asset transfer and inter-companyadvances.CollateralIf debt issued by the senior living obligated groupdebt is fully secured by a pledge of all or substantiallyall of the assets of the obligated group facilities,such pledge should reduce the parent’sincentive to attempt to cause the obligated group tovoluntarily file itself into bankruptcy. Such a securitypledge could include:■ A gross revenue pledge and a general pledge ofassets, including mortgages;■ The parent’s pledge of any interest in the subsidiary;■ All pledges must be perfected; and■ In addition, all non-recourse debt must be similarlysecured.For a complete description of Standard & Poor’s‘ring-fencing’ criteria, please see, “Ring-Fencing ASubsidiary”, RatingsDirect, Oct. 19, 1999. ■Physician GroupsAnd Faculty Practice PlansHealth care industry changes, including reimbursementreforms at the state and nationallevels during the past 15 years, have helped developand expand more cost-effective outpatient treatments.At the same time, limitations on physicians’income and the emergence of large hospital-basedoutpatient departments have increased physiciangroup competition with hospitals by bringing businessinto physician-owned outpatient settings thattraditionally have been performed at hospitals.Ambulatory surgery and radiology procedures aretwo good examples that are often offered by wellorganized,well-capitalized multi-specialty grouppractices, and typically at a lower price than hospitals.These physician groups occasionally needaccess to capital to build facilities and purchaseequipment that will allow them to provide costeffectivehealth care services.www.standardandpoors.com169