HOW HEALTH CARE BORROWERS CAN NAVIGATE FINANCIAL REPORTING IN AN - PowerPoint PPT Presentation

HOW HEALTH CARE BORROWERS CAN NAVIGATE FINANCIAL REPORTING IN AN UNCERTAIN ENVIRONMENT THIS DOCUMENT IS CURRENT ONLY AS OF MAY 8, 2020 1 This document is solely intended to provide insights and best practices for the client – this document does not constitute client advice

COVID-19: Impact on Nonprofit Health Care Credits • In March 2020, The Centers for Medicare & Medicaid Services (CMS) and most states through emergency declarations and executive orders limited or stopped health care providers from performing elective procedures • All three rating agencies have a negative outlook on the health care sector – Revenue declines due to canceling or postponing elective procedures – Expense increases due to higher staff costs and supply costs – Market declines impacting liquidity balances – High degree of uncertainty as to how long it will take to contain the virus and how long it will take the economy to recover 2

COVID-19: Impact on Nonprofit Health Care Credits • Mitigating Impact and Relief for Hospitals – Medicare Accelerated Payment Program – Paycheck Protection Program – CARES Act – FEMA and other grants • Market/Investor Reaction – Increased scrutiny of health care credits; only higher rated credits are currently accessing the market – Investors are focused on impact of COVID-19 on financial and operating condition of the borrower 3

Agenda 1. SEC Guidance on COVID-19 Disclosures in Corporate Market 2. Review of Federal Securities Laws for Municipal Market vs. Corporate Market 3. COVID-19 Accounting and Financial Reporting Implications 4. Timeline for Upcoming Financial Reporting 5. Best Practices for Developing COVID-19 Disclosures 4

JENNA MAGAN ROBYN HELMLINGER LINDSEY ROE vcmagan@orrick.com rhelmlinger@orrick.com lindsey.roe@ey.com

SEC GUIDANCE ON COVID- 19 DISCLOSURES IN CORPORATE MARKET 6

SEC Urges Disclosure of COVID-19 Impact • In a joint statement issued on April 8, 2020, SEC Chairman Jay Clayton and Division of Corporation Finance Director William Hinman released guidance urging public companies for the upcoming Q1 2020 earning season to: – provide as much information as is practicable regarding their current financial and operating status, as well as their future operational and financial planning ○ Disclose where the company stands today, operationally and financially ○ Disclose how the company’s COVID-19 response, including its efforts to protect the health and well-being of its workforce and its customers, is progressing ○ Disclose how its operations and financial condition may change as efforts to fight COVID-19 progress 7

SEC Urges Disclosure of COVID-19 Impact • Clayton and Hinman noted that earnings reports and investor calls for Q1 2020 “will not be routine.” • “In many cases, historical information may be substantially less relevant.” • “Investors and analysts are thirsting to know where companies stand today, and importantly, how they have adjusted, and expect to adjust in the future, their operational and financial affairs to most effectively work through the COVID-19 health crisis.” • “We recognize that producing forward-looking disclosures can be challenging and believe that taking on that challenge is appropriate.” 8

SEC Urges Disclosure of COVID-19 Impact • Clayton and Hinman believe there are three reasons that companies should strive to provide, and update and supplement, as much forward-looking information as practicable: – The information will benefit investors – Market digestion of the information will benefit the company – Broad dissemination and exchange of firm-specific plans for addressing the effects of COVID-19 under various scenarios will substantially contribute to our nation’s collective effort to fight and recover from COVID-19 • On May 4, 2020, Clayton and the Director of the Office of Municipal Securities released a statement encouraging muni issuers to provide investors with the same robust disclosures they encouraged public companies to provide 9

FEDERAL SECURITIES LAWS FOR MUNICIPAL BONDS 10

Federal Securities Laws for Municipal Bonds vs. Corporate Securities • Securities Act of 1933 – Registration requirement for most securities, but municipal bonds are excluded • Securities Exchange Act of 1934 – Creates ongoing disclosure requirements for public companies, and regulates brokers and dealers ○ Public companies are directly obligated by the 1934 Act to disclose on an annual and quarterly basis but municipal issuers and obligors are indirectly obligated to disclose if subject to a continuing disclosure agreement required to be obtained by underwriters under Rule 15c2-12 of the 1934 Act • Both 1933 Act and 1934 Act contain antifraud provisions, which do apply to municipal securities 11

SEC Rule 10b-5 • The main antifraud provision – SEC Rule 10b-5 of the 1934 Act - applies to both municipal bonds and corporate securities: “It shall be unlawful for any person . . . a) To employ any device, scheme or artifice to defraud, b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading . . . .” Must be “in connection with the purchase or sale of any security” 12

The “Materiality” Standard • “[w]hether or not there is a substantial likelihood that a reasonable investor or prospective investor would consider the information important in deciding whether or not to invest.” • Guidance comes primarily from court decisions and SEC enforcement cases • Materiality is determined in context of all the facts and circumstances, but usually on a retroactive basis • What is material is an evolving concept - materiality threshold 13

When Does SEC Rule 10b-5 Apply? • SEC Rule 10b-5 applies whenever an issuer or obligor is “speaking to the market” – New public offerings – Reports and filings on EMMA under Continuing Disclosure Agreements – Voluntary filings on EMMA – Other circumstances ○ Public statements by officials ○ Investor website – Confidentiality and business concerns, and political sensitivity are not exceptions to application of disclosure rules 14

Health Care Borrowers Historically Have Looked to SEC Rules in Corporate Market as Best Practice • Health care borrowers are required to provide quarterly disclosures to investors similar to public companies (but unlike others issuers and obligors in the municipal market) • Health care borrowers generally follow SEC guidance for financial statements in offering documents for public offerings – Bonds are priced no more than 135 days after the date of the financial statements disclosed in offering document • Health care borrowers can be more sophisticated and are treated more like public companies than other municipal issuers 15

COVID-19 ACCOUNTING AND FINANCIAL REPORTING IMPLICATIONS 16

Disclaimer 17

COVID-19 – Accounting and financial reporting implications Variable consideration Contract existence: Revenue New and existing contracts Credit losses Inventory Asset impairments Goodwill, long-lived, and other intangibles and insurance Deferred tax assets Classification based on TDR, modifications, Debt impacts to covenants extinguishments CARES Act reporting CECL application Financial instruments Hedge accounting Fair values, impairment Rent concessions, lease Leases Incremental borrowing rate modifications, lease abandonment Loss contingencies Going concern Financial statement disclosures Subsequent events Risk and uncertainties 18

Interim impairment considerations • Effects of current economic environment may be an impairment indicator requiring an interim impairment test • Interim impairment evaluation requires significant judgment • Order in which assets generally are tested for impairment: Indefinite-lived intangible assets (ASC 350-30)* 1 ► Annually, or more frequently if impairment indicators exist Long-lived assets to be held and used (ASC 360) 2 ► When impairment indicators exist Goodwill (ASC 350-20) 3 ► Annually or more frequently if impairment indicators exist * Other assets subject to impairment testing are tested at same time (e.g., inventory) 19

Asset impairments: Potential triggering events If the answer to any of these questions is ‘yes’, a triggering event may have occurred and impairment testing may be required Questions to Consider  Has our supply chain been disrupted so that we cannot procure raw materials or components for finished goods?  Has volatility in commodity prices negatively impacted revenues or production costs?  Have workforce limitations impeded our ability to manufacture products or service our customers?  Have we provided concessions to our customers that exceed normal business practice?  Have we lost business due to event cancellations, store or facility closures, lower consumer sentiment, etc.?  Are operations being curtailed temporarily, or assets mothballed?  Have the circumstances significantly changed how we expect to use our long-lived assets?  Are our customers struggling to pay their obligations or even remain in business?  Has our stock price significantly decreased?  Have we revised our earnings guidance downward? 20