HJ Sims Partners with Asbury Communities to Provide Funds for Capital Improvements During a Volatile Market
“Asbury is continually impressed with our partnership with Sims. We were able to maximize proceeds for our capital needs in a difficult bond market while not impacting on our current bond rating, meeting our annual debt service requirements and all within our existing covenant structure. We couldn’t have asked for more.”
— Andrew Jeanneret, CFO
Asbury Communities, Inc. (“Asbury”), owns and operates life plan communities in Maryland, Pennsylvania, and Tennessee, as well as HUD Section 202 senior housing buildings, a foundation, and a for-profit technology consulting firm. All of the facilities that are included in its Maryland and Pennsylvania Obligated Groups are owned and operated by Asbury Atlantic, Inc., a wholly-owned subsidiary of Asbury Communities.
Asbury’s Maryland Obligated Group (the “MD Obligated Group”) consists of two life plan communities – Asbury Methodist Village (“AMV”) located in Gaithersburg, Maryland, and Asbury Solomons (“AS”) located in Solomons, Maryland. AMV consists of 826 independent living units, 133 assisted living units, and a 285-bed skilled nursing center and related amenities. AS has 300 independent living units, 24 assisted living units and a 48-bed skilled nursing facility.
HJ Sims has served as underwriter to Asbury for several transactions in recent years, most recently on a refinancing for Asbury’s Pennsylvania Obligated Group in 2021.
HJ Sims was engaged again by Asbury in early 2022 to assist with financing capital improvements at both AMV and AS. The majority of these improvements will be “behind the walls” and are meant to modernize the infrastructure and facilities at both campuses in Maryland.
HJ Sims ran several fixed-rate bond and bank debt scenarios to determine the most effective financing vehicle. Ultimately, due to the MD Obligated Group’s existing capital structure, Asbury chose to use fixed-rate bonds to finance the improvements. The MD Obligated Group’s largest annual debt service payments are scheduled to occur in the next five years. As such, HJ Sims could structure fixed-rate bonds to wrap around Asbury’s existing debt to limit the impact to maximum annual debt service “MADS”. A fully amortizing bank loan, while having the lower cost of capital, would have significantly increased MADS.
In determining how much to borrow, Asbury wanted to balance its debt capacity, total capital needs, and impact on its BBB (Fitch) investment grade credit rating. HJ Sims worked with Asbury to determine the effect of various borrowing amounts on the Maryland Obligated Group’s credit rating. HJ Sims and Asbury presented borrowing scenarios that ranged from $25 to $40 million with their projected impact to the Maryland Obligated Group’s metrics to Fitch as part of their Ratings Assessment Service. Based on Fitch’s review, Asbury knew that it could borrow the highest amount of $40 million without a negative impact to the credit rating.
Further, to improve the efficiency of the financing, HJ Sims and Asbury decided to eliminate the parity debt service reserve fund (DSRF) in favor of a springing DSRF. This change permitted up to nearly $2 million in bond proceeds to be used towards the capital improvements in lieu of funding a deposit to the DSRF. HJ Sims and Asbury decided to switch to a springing structure because the MD Obligated Group’s liquidity position was projected to improve significantly once the Series 2022 Bonds closed. Despite investor pushback on this change (due to the lessened security for the bonds), HJ Sims and Asbury held firm with the parity DSRF structure.
Between the time Asbury began contemplating the borrowing and the pricing of the fixed rate bonds, the municipal bond market deteriorated significantly primarily due to sustained outflows from bond funds, inflationary pressures, and anticipated Federal Reserve rate hikes. On the day before pricing, the Federal Reserve announced an anticipated 0.50% rate hike. The Treasury markets appeared to accept the announcement in stride and remained stable for the rest of the day. However, volatility quickly returned overnight with the 10-year Treasury increasing by 17 bps. Notwithstanding the volatile market, HJ Sims successfully sold the bonds and maximized distribution with a 4.50% coupon, which significantly reduced MADS compared to a premium bond structure.
On May 18, 2022, HJ Sims closed on the $40 million Series 2022 Bonds. To reduce MADS, HJ Sims split the 2042 bond to include two term bonds: one with a 5.125% coupon yielding 5.000% and one with a 4.500% coupon yielding 5.200%. The 4.500% coupon was a significant win for Asbury as investor demand had turned towards 5.000% coupons and higher in the months leading up to the pricing of the Series 2022 Bonds. Wrapping the Series 2022 Bonds around the Obligated Group’s existing debt resulted in a modest increase in MADS of $1.8 million. As mentioned, the Series 2022 Bonds did not have a funded parity DSRF at closing, which allowed additional proceeds to be allocated to the projects.
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