Consider Supporting the Reinstatement of Advance Refundings
Advance refundings are a critical tool to help state and local governments and 501(c)(3) organizations lower their debt costs.
Nearly three years ago, advance refundings were eliminated as part of the Tax Cuts and Jobs Act of 2017. At the time, the assumption was that the borrowers of tax-exempt bonds used to finance advance refundings would access the taxable bond market if an advance refunding was necessary. While taxable advance refunding volume has increased over the past two years, non-rated borrowers and smaller advance refundings have been essentially locked out of the taxable bond market.
Taxable municipal bond investors are not as prolific as tax-exempt municipal bond investors. The taxable muni market tends to focus more strongly on rated credits with considerable size. This leaves non-rated conduit borrowers, especially non-rated 501(c)(3) institutions like rural hospitals, universities and senior living communities at risk because they do not have access to the same markets to refinance higher coupon debt.
On July 1, 2020, eight bipartisan senators came together to introduce the LOCAL Infrastructure Act that reinstates advance refundings as a critical tool to help state and local governments and 501(c)(3) organizations lower their debt costs. Senators Roger Wicker (R-MS), Debbie Stabenow (D-MI), Michael Bennet (D-CO), Shelley Moore Capito (R-W.Va.), John Barrasso (R-WY), Bob Menendez (D-NJ), Jerry Moran (R-KS), and Tom Carper (D-DE) cosponsored the legislation. There is also legislation in the House that includes the reinstatement of advanced refundings. In light of this, we believe that now may be the best time to restore advance refundings.
How Can You Take Action
Write a letter to your U.S. senator appealing for their help to restore advance refundings through the Senate Finance Committee bill. Help the eight senators who have already come together to co-sponsor the LOCAL Infrasturcture Act.
The draft letter below is written from the perspective of a board member or officer at a non-profit senior living community.
Letter Text
Greetings,
I am a constituent of the Senator and the [_________________] of [____________________], a senior living community in the Senator’s state. I understand a bipartisan group of senators led by Mr. Wicker of Mississippi recently introduced the LOCAL Infrastructure Act, which would restore advance refunding bonds, and I would like to encourage the Senator to consider the legislation and assist in its passage in the Senate.
Use of tax-exempt advance refunding bonds has not only saved state and local governments billions of dollars, but it has also provided 501(c)(3) senior living communities similar to ours the opportunity to refinance our debt and restructure covenants in the past. If advance refundings were to be restored, it would allow more comprehensive services, including infrastructure projects and enhancements to senior living communities, to be completed at a lower cost. This tool would provide an opportunity for 501(c)(3) senior living communities as well as state and local governments to recover faster from the effects of the COVID-19 pandemic and to efficiently access low interest rates to provide essential facilities and services to your constituents.
As a result of the COVID-19 pandemic, many senior living communities, state and local governments and other obligors of tax-exempt bonds are experiencing dire financial situations, and some are having difficulty paying scheduled principal and interest on their outstanding debt. It would greatly benefit such entities to be able to refinance their debt at today’s interest rates that are often lower than the interest rates payable on outstanding debt, which often was issued years ago. While there has been a surge of taxable municipal bond issuance to advance refund debt in recent months, the investors in those bonds will typically purchase transactions of considerable size and with high investment grade ratings. This leaves the super-majority of senior living communities without a viable option to refinance debt at a time when the Federal government has brought bank lending rates down to less than 0.25% and municipal bond indices are hovering around all-time lows. Many senior living communities that have debt that would be beneficial to refinance today issued that debt between 2011 and 2015 where the municipal bond index was 2-3% higher than where it is today. This could save senior living communities millions of dollars, benefitting your constituents.
These advance refundings could even allow senior living communities to defer debt service in the near term to respond to cash flow issues as a result of the pandemic. As communities’ existing debt is often paid with healthcare revenues and other revenues received from residents, these streams have been interrupted as some communities have been hard hit by COVID-19 infection and others have locked down all ability for new residents to move-in.
If you would like more information on how advance refundings could benefit senior living communities in general, please do not hesitate to connect with an HJ Sims Investment Banker at hjsbanking@hjsims.com. HJ Sims is a privately-owned investment bank that was founded in the midst of the Great Depression and was the first investment bank to finance a senior living community with tax-exempt bonds after the advent of Medicare in 1965.
We believe strongly that the reinstatement of advance refundings would be a tool that could provide significant savings to the senior living industry at a time when providers need all of their tools available to provide low cost care to the most vulnerable population. We encourage you to consider supporting this bipartisan effort to help state and local governments and 501(c)(3)s like ours.
Thank you.
Senate Finance Committee Members