A bond underwriter with a specialty in senior living facilities is deploying some outside-the-box financing tools for those clients.
Several of HJ Sims' senior living clients have sought to restructure their debt. With tax-exempt advanced refundings off the table, the firm turned to not only the most common alternative, taxable refundings, but also less common options, including Cinderella bonds, tender offers and forward refundings.
“We looked at the different alternatives that would be available,” said Melissa Messina, a Sims senior vice president. “And we looked at different structures that had been barely used before.”
After Congress eliminated advance refundings with the Tax Cut and Jobs Act of 2017, Sims realized there was a significant population of municipal bond issuers and conduit bond borrowers who had reason to advance refund their bonds.
Messina said that the current economic situation demands innovative thinking to help the senior living industry.
“One of the reasons right now it’s so important right now during the time of COVID, especially for the senior living industry, is that a great number of borrowers have experienced additional cash demands,” Messina said.
“Borrowers are always looking for ways in which they can create cash flow,” she said. “And that is why we felt it was important right now to revisit the successful ways in which we were able to help borrowers achieve cash flow improvement.”
With a Cinderella structure, the borrower advance refunds tax-exempt bonds on a taxable basis. But the taxables automatically convert to tax-exempts, either at midnight 90 days before the call date of the refunded bonds or at the reversal of the advance refunding prohibition.
This strategy looks to eliminate interest-rate risk after the escrow period because pricing and terms for the tax-exempt refunding bonds are agreed upon at the time the taxable refunding bonds are executed.
Sims used this technique in the refinancing of
Sims approached The Marshes to propose a bank-placed Cinderella refinancing of outstanding fixed-rate tax-exempts that would provide the borrower with significant savings on bonds that were issued in 2013 through the Savannah Economic Development Authority. The $47.1 million bank financing closed in December, saving The Marshes about $1.14 million annually, or $15.36 million in total.
“We have not seen a lot of so-called Cinderella bonds even though there were high expectations for them when the tax code changed,” said John Hallacy, founder of John Hallacy Consulting LLC. “The beauty of these bonds is that an issuer should be able to tap the market faster when uncertainties prevail.”
The deal was already in the works at the beginning of 2020, but ultimately had to be delivered amid the backdrop of the coronavirus pandemic.
COVID-19 has been disproportionately deadly for older Americans. As of Tuesday, 36% of the 455,455 COVID-19 deaths so far in the U.S. have been residents of long-term care facilities, according to the Covid Tracking Project. More than 80% of the U.S. dead were age 65 or over, according to Centers for Disease Control data.
The pandemic stressed many senior living facilities on both the cost and revenue side.
In 2020, about three dozen senior living municipal bond deals defaulted due to the pandemic, according to data from Bloomberg.
Before the pandemic arose, the changed tax law posed an obstacle to would-be borrowers.
For the
The group is comprised of the
“It is quite a bit easier to conduct a successful tender when there is only one bondholder,” Hallacy said. “A great deal of work takes place when there are multiple bondholders and the broker-dealer needs to convince the holders that it is in their best interest to go forward.”
As muni supply started to decline in 2018, Sims noticed that investors were more willing to make longer term forward commitments. So the company used a forward refunding strategy for the
In 2019, Sims contacted Peconic and discussed a potential refunding of its outstanding bonds that had been issued by the Suffolk County Economic Development Corp. The elimination of tax-exempt advance refundings meant immediate access to the tax-exempt market wasn’t possible and Peconic’s then-rating of BBB-minus made access to the taxable bond market impractical.
So Sims helped facilitate a forward refunding, pricing a $22.3 million 20-year term in late 2019 and saving Peconic more than $300,000 in annual debt service when the bonds settled in November 2020.
“Forwards have been around for some time. The N.Y. MTA and others have used them. It is just a matter of how much demand is out there,” Hallacy said. “In this market, the buyers are hungry and will consider all alternatives.”
For most borrowers, prevailing historically low interest rates mean the simplest advance refunding option is issuing taxable bonds because they can issue taxable debt today at lower rates than the tax-exempts they refinance, which means savings.
For the Westminster Communities of Florida, the largest provider of life plan communities in the Sunshine State, Sims used a taxable fixed-rate advance refunding of bonds through the St. Johns Industrial Development Authority to acquire the Glenmoor senior facility in St. Augustine. Within this growing market, bank-held and fixed-rate bond advanced refundings looked attractive and Sims found strong investor interest as Westminster proceeded with a $107.36 million taxable advanced refunding and a tax-exempt new money issuance to fund capital projects.
Still,
“As a real-life example, we can identify a community that opened in the mid-2010s when tax-exempt bond rates were materially higher. This community is performing well, but still has a significant debt burden. They are non-rated (and thus not a candidate for a taxable fixed-rate advance refunding), have a large par amount (and thus not an optimal candidate for a Cinderella refinancing), have a call date that is in 2024 (and thus too far out for a forward), and have a diverse investor base (and thus a tender option would not be practical),” Messina said. “If they were able to enter the tax-exempt bond market today to advance refund their bonds, we estimate they’d save over $2 million per year on their debt service."
But they can't use this tool. She said savings could have gone toward raising pay for frontline healthcare workers or converting rooms to single from double occupancy, which would help prevent future health crises.
“While we have been able to mitigate a lot of the damage caused by the elimination of tax-exempt advance refundings, there is still a significant population of borrowers that have lost the ability to access the capital markets and strengthen their financial position,” Messina said. “To that end, we watch Congress as they consider each new stimulus bill hoping that they will restore tax-exempt advance refundings for the municipal and 501(c)(3) borrowing communities.”
