Sims Leads $98 Million Refinancing and Works Collaboratively with Bank to Finance Independent Living Expansion
“Jim Bodine and Brethren Village have had a valued working relationship for many years so it was an easy decision to work with HJ Sims for our refinancing. The team at HJ Sims skillfully guided us through the process from the initial discussions to the issuance of the bonds in a tenuous market. Their efforts allowed us to have a very successful refinancing that will benefit our organization for many years to come.”
– Rodney L. Martzall, CPA, Vice President of Finance / CFO, Brethren Village
Brethren Village is a not-for-profit life plan community providing housing, health care and other supportive services to seniors in Lancaster and the Central Pennsylvania region. It is located on a 96 acre campus in Lititz, Pennsylvania. Brethren Village was incorporated in 1897 and opened as a stand-alone nursing home. Brethren Village has grown in multiple phases and today is comprised of 505 independent living apartments, 141 personal care units, 120 nursing beds, a separately licensed 20 bed rehabilitation center (the “Rehab Center”) and common areas.
Over the past decade, Brethren Village’s growth has included a campus repositioning project undertaken in 2008, combining the addition of independent living units and full realignment of its healthcare services and facilities (personal care, memory support and skilled nursing) and financed with $122.7 million of non-rated fixed rate bonds (the “Series 2008 Bonds”). More recently, Brethren Village undertook a series of capital projects, including a 23-bed rehabilitation expansion, together with campus building and technology upgrades. Financing consisted of $10 million of non-rated fixed rate bonds (the “Series 2015 Bonds”) and was underwritten by Sims.
In 2016, with interest rates near multi-decade lows and the call date for the Series 2008 Bonds approaching (July 2017), HJ Sims worked with Brethren Village to monitor the opportunity for refinancing of the Series 2008 Bonds. In the fall of 2016, with the prospect of a significant reduction in interest rates and realization of increased borrowing capacity, Brethren Village engaged HJ Sims to serve as Senior Managing Underwriter for the proposed refinancing of the Series 2008 Bonds. Sims was also asked to work collaboratively with Brethren Village’s independent municipal advisor in coordinating pairing of the refinancing with financing for a proposed independent living unit expansion project (“Northside Court Project”), anticipated to be funded with direct bank financing.
HJ Sims worked with Brethren Village to evaluate the impact of refinancing the outstanding Series 2008 Bonds, including options for enhancing debt service savings, as well as considering the proposed Northside Court project and related financing. Multiple options were considered for sourcing the financing for both the refinancing and new capital needs – this included the use of all bond financing as well as the potential combination of bond and bank financing, including using a portion of bank financing as part of the refinancing. Consideration was also given to pursuit of a credit rating from Fitch Ratings which could enhance the marketability of the bonds and reduce the interest rate, further enhancing debt service savings. Market conditions and timing of the financing were also more closely monitored as Brethren Village sought to complete the refinancing in the first or second quarter of 2017 (on or before the first optional call date of July 1, 2017) – Sims modeled both advance refunding and current refunding options and the trade-off between waiting until the current call date, at which time savings could be maximized, with the potential loss of debt service savings in the event of an interest rate increase.
Ultimately, Brethren Village opted to undertake the refinancing of the Series 2008 Bonds entirely with fixed rate bonds. This was based on the low level of fixed interest rates, within range of multi-decade lows, and anticipated strong investor demand, including local retail investors along with institutional investors, further favorably impacting the fixed interest rates and “all-in” cost of financing.
For the Northside Court Project financing, Brethren Village elected to use tax-exempt direct bank financing wherein a significant amount of entrance fees would repay the bank debt. It also afforded greater flexibility for repayment of a portion of the debt with entrance fees received from the sale of the new independent living units as well as the ability to have either a floating or fixed rate or some combination. Brethren Village anticipated applying a significant amount of entrance fees to repay the debt and also opted to maintain a floating rate on the debt to reduce its cost of financing and diversify its interest rate exposure.
Given the anticipated benefit of a credit rating, HJ Sims coordinated the solicitation of a rating from Fitch Ratings. Preliminary feedback suggested a below investment grade rating, due particularly to Brethren Village’s debt load, offset by strong organizational profile and market position, newly repositioned campus along with more recent expansion, as well as other strong operating and financial metrics. This ultimately was borne out as Fitch assigned a “BB+” rating, the highest in the below investment grade category, along with a Stable outlook.
With desired consideration of bond and bank financing, Sims worked with Brethren Village and its financial advisor to insure that the two components of financing, both constituting “parity” debt, would coexist on terms acceptable to both Brethren Village’s bondholders and the lending bank. This related particularly to affirmative and negative covenants and cure provisions as well as bank/bondholder creditor rights and remedies in the event of a default or other event requiring their consent. Ultimately, the bank financing was implemented with security provisions and covenants matching those contained in the existing Master Trust Indenture securing all parity debt, with the exception of one provision which was favorable to both the bondholders and bank.
The final plan of finance consisted of “BB+” rated fixed rate refunding bonds (the “Series 2017 Bonds”), structured with a combination of serial and term bonds, a 25-year final maturity and level annual debt service. The Series 2017 Bonds are structured with optional redemption provisions (at par) to enable Brethren Village to repay some or all of the bonds prior to maturity, if desired. The Northside Court bank financing was structured as a variable rate tax exempt direct placement with one bank. The term of the bank commitment is 10 years and has a 25 year principal amortization. Ultimately, except for one new provision, the bank financing was implemented with security provisions and covenants matching those contained in the existing Master Trust Indenture securing all parity debt.
Market conditions in early 2017 improved dramatically from late 2016, following the U.S. Presidential election. With this favorable market backdrop, coupled with commencement of Northside Court Project construction, Brethren Village proceeded with the financing at the end of the first quarter and sought to close the transaction in early April in order to qualify the refunding as a “current” vs. advance refunding. Given the favorable market conditions and Brethren Village’s excellent reputation and credit profile, investor demand for the issue was strong, and bonds were sold to a combination of retail and institutional investors, including both existing and new investors, which favorably impacted the fixed interest rates and “all-in” cost of financing. Brethren Village realized approximately $16 million in net present value savings, equaling 15.9% savings of the refunded bonds.
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