Question

Describe the problem created when a call provision for a bond comes due forcing as hospital to have refinance their debt. What challenges can this create for hospital's balance sheet and P/L statement?

Answer 1

When interest rates drop, the company will want to refinance its debt at the new rate. Because the debt was issued during a time of higher interest rates, the company is paying more in interest than what current market conditions would specify.

Corporate refinancing is the process through which a company reorganizes its financial obligations by replacing or restructuring existing debts. Corporate refinancing is often done to improve a company's financial position. ... It can also be done while a company is in distress with the help of debt restructuring.

When a company chooses to refinance its debt, it can do so by taking one or both of the following actions:

• Restructuring or replacing the debt, generally with a longer time to maturity and/or lower interest rate, or
• Issuing new equity to pay down the debt load. This option is generally exercised when the company can't access traditional credit markets and is forced to turn to equity financing.

A corporate refinancing may also be undertaken if a company expects to receive a cash inflow from a customer or other source. A significant inflow can improve a company's credit rating and bring down the cost of issuing debt (the better the creditworthiness, the lower coupon they will need to pay).

After the company refinances its debt, it generally reaps several benefits, including improved operational flexibility, more time and cash resources to execute a specific business strategy and, in most cases, a more attractive bottom line due to decreased interest expense.