Sell Side

Health Care and Nothing But

CHICAGO - Former JPMorgan tax-exempt capital markets banking manager Mark T. Melio spent most of the last two decades building the nonprofit health care practices of JPMorgan and Goldman, Sachs & Co. - experience that's now a principal selling point of his new, national advisory firm focused on the struggling sector.

"I believe our firm is going to stand out as one that provides senior level, day-to-day coverage and strategic thinking to hospitals that's coming from deep experience in the capital markets," Melio, 49, said in a recent interview about the opening of Northfield, Ill.-based Melio & Co. late last month.

"With what's happened in the market over the last two years, I hear in talking to hospitals that the not-for-profit hospital client base needs a financial adviser they can trust with experience and capital market expertise."

Melio believes that capital markets experience is all the more valuable lately because of the insight it provides into the investment banking world at a time when borrowers are "more cautious" in dealing with bankers given the failure of once-popular products like auction-rate securities, and because of negative swap valuations.

As Melio meets with hospitals he has had longstanding relationships with as a banker, he is also interviewing. He wants to hire as many as a half dozen advisers with 15 years of direct capital markets banking experience to work for his firm in Chicago and in offices he hopes to open on the West Coast and in New York City by the end of 2010.

The University of Chicago Medical Center is Melio's first client. The hospital hired the new firm to advise on its planned $500 million transaction that will raise funds for its new hospital pavilion. About $275 million of the transaction is expected to sell in July or August.

The sector is a lucrative one. Hospitals sold $42.4 billion of debt over the last decade in nearly 5,400 transactions, with issuance steadily rising from $20.4 billion in 428 deals in 2001 to $58.5 billion in 682 deals last year. Issuance so far in 2009 is around $19 billion in 215 transactions, according to Thomson Reuters.

While governments, universities and other sectors have struggled over the last year with ongoing market turmoil and recession-related revenue declines, the health care sector is among the hardest hit by the credit crunch.

Many hospitals put new-money issues on hold as they were forced to focus on restructuring ARS after that market's collapse in early 2008.

Ready to raise new money late last year, hospitals were forced to hold up deals after Lehman Brothers' collapse in September. Higher-rated credits looking to sell fixed-rate bonds continued to postpone their offerings, upset with the yields demanded by risk-averse investors, and lower-rated credits were shut out as the rates demanded were too high.

Triple-B credits have in recent months found buyers, but are paying rates in the 7% and 8% range.

The rating agencies maintain a negative outlook on the hospital sector as a whole, based on the assumption that the recession will aggravate such challenges as weak patient volume and exposure to bad debt expenses.

While the federal stimulus program, which provides $87 billion for Medicaid, is expected to offer some financial relief, the uncertain impact of national health care reform looms.

Melio sees market access as an ongoing challenge for single-A and triple-B credits given increased liquidity costs, while those in the double-A category face other management challenges.

"The higher credits still need to carefully evaluate their debt portfolios to lower borrowing costs and manage risks and maintain flexibility going forward in these uncertain and unprecedented times," he said.

Melio spent the last 12 years at JPMorgan, formally resigning last month after leading the firm's national health care, higher education and cultural institutions group. In summer 2006, Melio was named co-head of the tax-exempt capital markets investment banking group along with Gene Saffold.

In early 2008, Melio temporarily took over sole responsibility for the group as the firm sought to streamline investment banking originations. Saffold moved over to manage national public investment accounts and earlier this year to become Chicago's chief financial officer.

Melio most recently was managing the group with co-head Jeff Bosland, whose background was in U.S. agency trading and underwriting.

Bosland managed JPMorgan's sales, trading, syndicate and credit portfolio, and analysis groups while Melio managed banking. In March, the firm again decided to shift back to single leadership and the reins of the group went to Bosland.

During Melio's tenure managing the group, JPMorgan acquired Bear Stearns & Co. and then in mid-2008 undertook deep cuts of 10% to 15% as it merged the public finance groups of both firms.

Before joining JPMorgan, Melio worked for 10 years as a health care and higher education banker at Goldman Sachs in New York for five before moving with that firm to Chicago, and previously was a health care consultant and auditor at Touche Ross & Co.


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