In the article, Pierre Bogacz of HFA Partners, a firm specializing in risk management for nonprofits, examines a typical decision hospitals face regularly, whether to renew an existing letter of credit (LOC) or turn to variable rate financing. He recommends that each financing vehicle be stress-tested using a financial risk simulation that takes into account the hospital’s entire balance sheet. Financial risk modeling–I assume using Monte Carlo software–is the way to calculate the risk-adjusted cost of debt, and the simulations that result can serve as a valid basis of comparison among various sources of credit.
Bogacz makes the important point that it is easy to become comfortable with a current lender, and this in itself is a risk. He believes that an expanded search for lenders is not only a sound risk avoidance practice, but it often yields information otherwise hard to come by–like how your current lender stands among its competitors. He is not saying "Don’t trust your banker." He’s saying "Do the math, run a financial risk analysis, and come up with what it really costs to borrow that money."
