Healthcare finance companies and other entities lending against insurance payment obligations are increasingly looking towards the securitization market as a source of funding.
According to sources at Credit Suisse First Boston, the bank may be arranging financing collateralized by insurance receivables for several emerging specialty finance companies during the first half of next year. "People who rely on insurance obligations are taking a harder look at these assets and determining the most efficient way to finance them," said Jonathan Clark, a director at CSFB, which has led 12 of the past 14 deals of benchmark healthcare securitizer National Century Financial Enterprises (NCFE).
Following the NCFE model, much of the potential for this sector is associated with the use of the insurance receivables owed to healthcare providers or others, as insurance companies are stronger credits than the providers or the companies lending to them.
"At the nexus of where insurance and health care come together, you have a classic opportunity for securitization, because the underlying obligors, depending on the type of insurance, normally range from single-A to double-A," Clark said.
Most of the new entities looking at securitization are finance companies in the various niches of healthcare, including hospitals, and other ancillary providers such as nursing homes and rehabilitation centers.
Different from NCFE, which purchases receivables, some of the potential securitizers are lenders, and their deals will be more in line with a future-flow analysis.
In addition to insurance companies, obligors might also include government programs such as Medicare and Medicaid, said Mack Caldwell, a vice president and senior credit officer at Moody's Investors Service who has been looking at proposals.
According to Caldwell, the government programs are obviously creditworthy but can introduce new challenges, as it is difficult to transfer a Medicare/Medicaid receivable to a new owner (or into a trust).
"You can sell the receivable but you can't get them to pay anyone but the healthcare provider, so there could be problems," Caldwell said. "At the very least it creates a delay problem, but at the most it creates a commingling issue."
From a ratings perspective, the healthcare finance deals introduce a joint probability of default, with the first recourse against the hospital - even though the loan is secured by the insurance obligation and the second recourse against the insurance company or payer itself.
Outside of the taxable securitization market, there have been two quasi-securitization/project finance special purpose vehicles backed by insurance company receivables: Aurora and Adventist.
In those deals, regional hospitals sell directly into the SPVs, which then periodically issue term notes. Adventist has issued twice, first in 1996, and again last fall, when Aurora issued its first series.
Caldwell sees this type of vehicle as another area of potential growth.
Other than healthcare finance, players like J.G. Wentworth have also securitized structured settlements where the underlying obligor is the insurance company. In J.G. Wentworth's last deal, which CSFB brought to market in August, the company securitized small claims injury settlements, which it had purchased from payees.
In these deals, the insurance company will typically buy an annuity, which directs cash to the payee over a certain time period. A portion or the entire settlement is then purchased by a company like Wentworth, which then pools and securitizes the cashflows.
