Many financing structures include more than one layer of priority lien on the revenue dedicated to repayment of the loan and/or return to equity.  Those structures are used in the healthcare finance sector to finance provider capital projects, equipment acquisition, and receivables.  (Often, a priority of payment hierarchy will also be included within a transaction for single layer; for example debt service reserve funds of tax exempt debt transactions are expected to pay the first defaulted debt service payments (“losses”) before the bond-holders must absorb reductions or elimination of their right debt service payments.) In the insurance sector, this ability to slice an obligation to pay into several layers of priority results in products such as “first-loss” reinsurance.  Given that the most junior investors in a given financial structure are at highest risk of non-payment, they demand a much higher rate of return on their investment in the form of dividends and/or stock price appreciation in the case of equity, interest in the case of debt, and premium payments or ceding commissions in the case of insurance or reinsurance.  And the most junior layers in a given financing or insurance structure can often be the hardest to find at any price.

Compassionate capital, e.g. Grants or Program Related Investments (PRIs) by philanthropies, social investments by wealthy individuals, union pension funds, etc. can be used instead of conventional sources to provide lower cost or free “first loss” financing layers, either bringing a financing structure which had heretofore been impossible into the realm of possibility, or substantially driving down the all-in financing cost or otherwise changing the terms of equity and/or credit favorably.

According to Steven Wright of Aequitas Capital, CareCard has been exploring the possibility of hospital foundations taking junior layers in the financing of their credit card receivables – this could reduce the discount charged to the hospitals in CareCard’s purchase of the receivables,  a savings which could ultimately flow back to the patients in the form of a better pricing of the uncovered portion of procedures or could be retained solely by the provider in the form of better retained earnings. If the provider’s own pool of compassionate capital is used to provide this layer, it should reinforce for the provider that they have a direct stake in successful patient health and financial outcomes.

The New York City Affordable Housing Acquisition Loan Fund (the Acquisition Loan Fund) has created a multi-tranche financing structure which includes a very low priority lien “mezzanine” debt layer in the form of a guaranty fund, supplied using Program Related Investments by a consortium six leading philanthropic foundations, including Rockefeller, Ford, Robin Hood, and MacArthur.  This fund substantially enhances the senior debt’s credit quality, making it far less expensive when it is supplied more or less conventionally by a bank syndicate. A key element of this structure is an extensive legal opinion which gives comfort to the foundations that their investments in the Guaranty Fund qualify as Program Related Investments from the moment the money is deposited in the Fund, (rather than from the time the money is committed to specific projects), as long as the return expected on the fund is at a below risk-adjusted market rate. The PRI investment was a $32.6 MM, making possible a total Acquisition Loan Fund size of over $200 MM, to be made available on a revolving basis to non-profit and for-profit developers of affordable housing for initial land acquisition at an all-in interest rate of 7.65%.

As Aequitas’ exploration of using hospital-supplied compassionate capital may illustrate, the use of compassionate capital for junior (“first-loss”) layers may be useful in driving down the cost of receivables financing and/or consumer credit financing of uncovered medical expenses.

Speaks to multiple leverage points.

• Potential  of new alliances to create risk pooling or collective purchasing/action
• As entities explore ideas such as non-profit medical credit, they could find interesting new partners, e.g. those with compassionate credit to invest in equity or mezzanine tranches of medical credit card receivables transactions.
  
• Risk sharing at the micro level balanced against risk management at macro level.
• If a provider’s own compassionate capital pool is placed in a first loss position of a receivables and/or consumer credit transaction, it may help reinforce for the provider how big a stake it has in successful health and financial outcomes for the patient.