Not much change in the week-over-week rate story, so for this email we replaced our regular chart with one that compares August 18, 2021, rates against historical averages (January 2009 – January 2021). It is an amazing picture, especially the continued low cost to transfer long-term risk.

Taxable Benchmark

Fed Funds

5Y UST

10Y UST

30Y UST

30Y-FF

18-Aug-21

0.10%

0.77%

1.26%

1.90%

1.80%

Avg: Jan 09-Jan 21

0.70%

1.79%

2.49%

3.18%

2.48%

Tax-Exempt Benchmark

SIFMA

5Y MMD*

10Y MMD*

30Y MMD*

30Y-SIFMA

18-Aug-21

0.02%

0.38%

0.88%

1.50%

1.48%

Avg: Jan 09-Jan 21

0.60%

1.37%

2.21%

3.24%

2.64%

Relative Value

ST Ratio

5Y Ratio

10Y Ratio

30Y Ratio

30Y-FF

18-Aug-21

20.0%

49.4%

69.9%

79.1%

82.4%

Avg: Jan 09-Jan 21

85.6%

76.5%

88.8%

101.9%

106.5%

* Note: MMD reflect 5% coupon.

 

Resiliency Is All About Resource Management

It seems like each passing week offers some new COVID development that makes me scratch my head and wonder how we will ever unwind all this—how we will ever get back to “normal”? The reality is that we won’t go back; COVID, and more specifically how we are responding to it, is changing everything about how we live as individuals and as a collective. The economic transformation started in 2008 and COVID has solidified some of the responses from that initial crisis while unleashing others, such that we now find ourselves in a place where there seems to be no monetary or fiscal policy constraints on either the Federal Reserve or the federal government. More troubling is that for the first time in my experience working in risk-resource management, a client shared their Board’s concern over escalating U.S. political risk, and specifically the idea that major adjustments to the core U.S. social contract can be imposed by narrow political majorities using the expedience of power politics rather than the long slog of consensus building. This client was not making a value judgement on the policies themselves; they were, instead, observing that the norms of U.S. self-governance seem to be shifting in ways that increase their organization’s exposure to the threat of rapid and material policy-driven economic dislocation.

Without doubt, we are living through a time of widespread disruption and there are smart people on both sides of the debate about whether all this will lead to a good or bad end. Unfortunately, none of us has ever actually dealt with many of the major disruptors we are confronting, which leaves us with response by educated guess. We hope for good outcomes, but we should plan for a lot of widespread volatility between here and there—and the only volatility we can practically plan for is representative versus actual. The pathway through this transformation cycle requires making resiliency a central organizational objective; and the only way to achieve financial resiliency is through effective resource allocation. The paradigm works as follows:

  1. Every healthcare organization is a collection of diversified economic activities, each of which has a different resource vs. risk profile and resiliency vs. return impact
  2. The central tension is around the myriad big and little choices between resiliency or return; both are necessary, so the first issue is finding a balance point that makes sense for your organization, and the second is discerning how specific opportunities fit into that bigger puzzle

The journey to better and more intentional resource allocation starts with defining what is available to your organization. Resources can take many forms, perhaps including things like:

  • Risk Management Resources: What is your organization’s ability to defend both return and resiliency by effectively managing specific operating or strategic risks? Can you enhance your risk management capabilities enough to minimize their dilutive impact?
  • Internal Resources: What is the pool of internal resources that are available, and should they be repositioned to provide an enhanced resiliency-return contribution?
    • Credit and Capital Resources: What is the credit position of the organization and the implications of a target credit position and the use of internal or external capital?
    • Physical Assets: What are the assets on your organization’s balance sheet and is it better to hold them in their current form or convert them into a different type of asset or capitalize them in a different way?
    • Financial Assets: What is the amount of unrestricted cash and investments and what are the rules governing how these resources are deployed?
  • External Resources: Is there an opportunity to purchase or borrow a third party’s resources at a fee, interest rate, or cost that makes the transaction accretive to the resiliency-return balance?
    • Commercial Hedges: Are there commercial products available such as insurance or bank credit facilities that can free credit and capital resources to focus on other things?
    • Financial Leverage: Are there capitalization tools or products—such as lines of credit, long-term debt, leases, etc.—that can expand or extend the internal resource base?
    • Operating Leverage: are there management structures—such as public-private partnerships, management agreements, etc.—that might generate a better risk-return position?

In our August 7 email, we talked about the need for better risk management and the same basic themes apply to resource management; but the value proposition around this work becomes transformative when risk-resource management efforts are consolidated under a comprehensive resource allocation framework. Only this kind of integrated approach allows you to continuously identify, test, and manage the role of each resource allocation decision in optimizing your organization’s resiliency-return relationship. Do you use equity or external leverage to finance a project? Do you pursue a real estate sale-leaseback transaction? Do you utilize equipment leasing? Do you enter into a public-private partnership transaction around energy assets? Do you put in place a line or credit and do you draw on it? Do you use floating rate debt and, if so, do you use self-liquidity? At the surface, these appear to be transactional questions, and this is how they are frequently addressed; but they are the drivers of resiliency, and the best answers can only emerge out of a resource allocation framework that is tailored to your organization. Integration is the gateway to resiliency (of risk-resource management and of dynamic management across operations, financing, and investing).

Meet the Author
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Eric Jordahl

Managing Director
Eric Jordahl directs Kaufman Hall’s Treasury and Capital Markets practice and focuses on helping healthcare organizations nationwide by providing Treasury-related transactional, strategic, and management support across all financial assets and liabilities.
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