As a threatened recession complicates capital markets, healthcare providers will increasingly think proactively about alternative liquidity options.
Rising interest rates, wage and price inflation, and staffing shortages will continue to present challenges to healthcare providers on multiple fronts. Due to these factors, we expect there to be a disconnect between the valuations of sellers (higher, based on multiples earned the past few years) and buyers (lower, based on the increased costs of financing and changing macroeconomic environment). This is likely to lead to decreased overall transaction activity until capital markets and valuations settle around a new equilibrium.
Healthcare providers looking to complete transactions during 2023 will need to be creative in structuring and funding. They should consider options including earnouts, seller financing, rollover transactions, sale leasebacks of real estate assets, or using joint ventures and partnerships to mitigate their reliance on debt financing and the potential issues related to any valuation disconnect.
Healthcare providers would be well advised to focus, if feasible, on transactions that diversify their revenue streams to help normalize revenue during potentially choppy financial times ahead. Finally, those companies and providers with cash are likely to be able to take advantage of lower prices that are expected to result from the current economic situation, with significant opportunities likely to be available in, for example, the health tech space, which has been particularly affected.
In 2023, healthcare providers will also need to actively monitor compliance with financial covenants in their credit documents and leases. As increased costs due to inflation and labor shortages combine with decreased revenues resulting from the threatened recession, companies and providers may have difficulty maintaining certain debt ratios required by such agreements and risk defaulting.
The expected economic slowdown in 2023 will also increase the chances of missed targets and negative events for healthcare providers. The increased cost of debt due to higher interest rates may make financing less attractive as an option for managing such situations. We therefore expect healthcare providers to increasingly look toward cost-cutting measures — including by deferring costs and optional projects — until the capital markets stabilize. Equity infusions will also be an option to raise cash, although they may not generate the same level of returns as in recent years due to the threatened recession and lower expected profits in the near term.