By Jacob A. McClellan
The need for capital in the health care industry is constant. Many healthcare providers find themselves turning to lenders or the capital markets on a regular basis. As markets change, health care borrowers may find it advantageous to work with a number of different financial institutions or debt products from transaction to transaction. Borrowers should consider implementing a Master Trust Indenture (“MTI”) in order to preserve this flexibility. MTIs were once the province of only large, multi-campus health systems. Today, even small single-campus healthcare providers are finding the flexibility an MTI offers to be essential. Borrowers without an MTI in place may be required to pledge all or most of their assets to a single lender and may subsequently be held hostage by that lender when considering subsequent borrowings, even when the lender is grossly over-secured and the borrower’s credit is strong. The MTI structure provides borrowers with an efficient way to secure current indebtedness and preserves maximum flexibility for future borrowings.
MTIs are often viewed as a structure only for large multi-campus health systems. As a result, smaller facilities often enter into “one-off” financings that contain extremely restrictive covenants or completely limit subsequent borrowings without lender consent. This often comes as a surprise to borrowers when subsequent borrowing becomes necessary. These borrowers find themselves at the mercy of their current lender even when the collateral granted to that lender is valued at several times the current outstanding indebtedness and could adequately support subsequent loans and projects. Faced with these problems, borrowers must decide whether to completely refinance all of their outstanding debt in order to get out from under the problematic covenants or to accept terms from their current lender which may be less advantageous than they could otherwise secure in the market.
MTIs create a structure pursuant to which parity notes may be issued to evidence and secure various indebtedness and pool the credit of two or more related entities by combining them into a single borrowing or credit group. The advantages to this structure are pooling of credit, flexibility and uniformity. To form a credit group, one or more members of the credit group enters into an MTI with a master trustee. The MTI may start with a single borrower, with additional members subsequently being added to the credit group. The MTI provides for the issuance of MTI notes or obligations to lenders to secure various pieces of indebtedness. Obligations and notes issued pursuant to the MTI are secured pro rata and on a parity basis, in the collateral granted to the Master Trustee by the credit group.
An MTI allows a borrower to grant rights and interests in certain collateral to a master trustee for the benefit of all its current and future lenders. For example, an MTI allows the borrower to grant a parity lien in favor of its working capital lender as well as long term debt holders. An MTI can be secured by any type of security interest, including a real estate mortgage. The MTI provides the baseline for all borrowing and governs the relationship and rights among a borrower’s various lenders.
Additionally, an MTI provides terms and conditions under which a borrower may take on additional indebtedness in the future. While individual loan documents may contain terms and conditions more onerous and perhaps more restrictive than those broadly applicable via the MTI, the flexibility of the MTI limits the likelihood of a borrower being held hostage by a single lender.
Reasons to Implement an MTI Structure
Flexibility: The MTI structure can accommodate the full range of debt financing options. It allows flexibility for all types of financings to benefit multiple locations with various lenders over time.
Increase in Credit Strength: The pooling of credit can result in greater credit strength for the group than for its individual members because of the increased size and diversity of the operations behind the credit.
Less Onerous Covenants: The greater strength of the credit group can also result in fewer and less onerous covenants for borrowers.
Uniform Borrowing Framework: The MTI structure provides a uniform borrowing framework for the credit group that provides for consistency in the terms and covenants of the indebtedness of the credit group.
Ease of Transfer of Assets Between Members: The covenants also permit assets of one member of the credit group to be freely transferred to another member, whereas in a single health care institution borrowing, the institution’s covenants ordinarily will make such a transfer more difficult and sometimes even impossible.
Additional Debt May be Issued on a Parity With Existing Debt: Additional debt may be incurred or assumed on a parity with existing debt under an MTI without limiting the character of the individual debt.
Accommodates Growth and Development: The MTI structure accommodates the growth and development of a multi-institutional system or single campus borrower, allowing the system or borrower to adapt to developments and changing environments within the health care industry.
Jacob A. McClellan is an attorney with Hall, Render, Killian, Heath & Lyman, P.C. He can be reached at email@example.com.