Malaysia's IHH Healthcare gets creative

Asia’s largest hospital operator has been improvising to maximise its capital structure as both banks and investors warm up to the sector.

The healthcare industry rarely needs to load up on debt due to its cash-generative nature. IHH Healthcare, Asia’s largest hospital operator, is nonetheless getting creative to get the most out of its capital structure.

This includes looking into renting its facilities instead of building them from scratch, as well as looking to structure potential real estate investment trusts, or Reits, to free up more cash to plough back into its business, Ahmad Shahizam, CEO of IHH Healthcare subsidiary Pantai Operations, told FinanceAsia.

“In our industry there are lots of other alternative ways beyond the conventional debt market where we can fund our new expansion,” Kuala Lumpur-based Shahizam said.

In locations where IHH is merely just testing the market, it prefers not to invest directly into the construction of hospitals since it would create a big dent in its balance sheet.

In such scenarios the firm would rather enter the market as a contracted operator — by helping third parties to operate a hospital. In return, IHH would reap a management fee on the back of the third party’s Ebitda (earnings before interest, tax, depreciation and amortisation), Shahizam said.

Alternatively, IHH could reach out to potential investors who are interested in investing in the healthcare industry, who own land and can build facilities for the company. The healthcare provider would then engage in a straightforward lease arrangement with a landlord, rent the building, and run and own the profit and loss account of the facility.

“That takes out the burden for the capital investment of the building itself,” Shahizam said. “In those arrangements, a long-term lease is important but we also typically incorporate into that framework a call option in year 12 or 13 so that we have the option of getting the assets back onto our balance sheet if we want to.”

IHH is a dual-listed — both in Singapore and Malaysia — global healthcare group that is majority-owned by Malaysia’s sovereign wealth fund, Khazanah Nasional. It currently owns and operates four hospitals in Singapore, 12 in Malaysia and 15 hospitals in Turkey.

When it comes to debt funding, IHH regularly accesses the bank loan market and usually engages in locally-denominated bilateral deals to avoid currency mismatches.

As of June 2014, the Malaysian entity had a total debt outstanding of M$4.3 billion ($1.24 billion), making for net debt-to-Ebitda ratio of 1.2 times — much lower than the company’s comfort level of around four times, Shahizam said.

This indicates that IHH has plenty of headroom to take on more bank loans.

The company has yet to consider tapping debt capital markets but only because numerous financial institutions are more than happy to extend bilateral credit lines to the company.

“[Banks] have the comfort not only in an established operator like ourselves but also the fact that these projects have very clear, viable streams of projected revenues and cash flows,” said Shahizam, adding that IHH is able to get loans with tenors of over five years for its projects, which usually take around four to five years to complete.

IHH reported a 26% year-on-year increase in its net profit to M$146.9 million for the third quarter. Its headline revenue grew 7% year-on-year to M$1.78 billion, while earnings grew 8% during the same time period to M$427 million.


In the equity space, IHH could look into structuring another Reit using its Malaysian portfolio of 12 facilities, Shahizam said, without giving a concrete timeframe.

A Reit is a dividend-rich security that sells like a stock on major exchanges and invests in real estate directly, either through properties or mortgages. In IHH’s case, it’s their hospitals.

IHH launched its first Reit  — Parkway Life REIT — in Singapore back in 2007. The company owns healthcare and healthcare-related properties in Singapore, Japan and Malaysia. On August 4, Parkway Life REIT said it will pay S$2.90 ($2.32) in distributions per unit for its second quarter, up 10.2% from a year ago.

However, Shahizam said the company has no pressing need to launch another Reit because it has arrangements with potential investors interested in investing directly in individual facilities. Also, bank loans remain readily available.

“[Structuring a Reit] is an option but it looks to be something further down that list of things that we would consider because the other alternatives are still a bit more attractive at this point in time,” he told FinanceAsia.

Asia’s burgeoning middle income population has allowed the private healthcare sector to thrive and IHH has been a huge beneficiary of this evolution.

IHH plans to add another 3,000 beds to its existing 6,000 beds over the next three years, it said in an announcement. The company currently has a portfolio of 37 hospitals, and the number is expected to grow as it looks to expand both within its established markets and beyond — in Abu Dhabi, Brunei, China, India and Vietnam.

“The main thrust of our growth is capitalising on the strong demographic and socioeconomic trends in each of these markets,” Shahizam said. “As many of these countries and economies get to a point where there is an emerging middle class, the demand for good quality private healthcare also becomes very apparent.”

The Asia-Pacific region’s healthcare spending is expected to grow at a rate of 7.1% from 2013 to 2017 as the rollout of public health care systems, growing consumer wealth, and lifestyle changes continue to boost demand, the World Health Organisation said in a report in August.
India has expanded its primary care policy priority and is expected to increase spending at an average rate of 17% a year, followed by China at over 14% a year. Indonesia, Thailand, the Philippines, and Malaysia are also likely to see double-digit percentage annual growth as they expand their health insurance systems, the WHO added.
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