Sims Successfully Leads $29 Million Debt Modification to Lower Debt Service, Fix Interest Rates and Extend Maturity
Laurel Lake is a not-for-profit life plan community providing housing, health care and other supportive services to seniors in Northeast Ohio. It is located on a 150-acre site in Hudson, approximately 16 miles north of Akron and 29 miles southeast of Cleveland.
Laurel Lake was incorporated in 1985, opened in 1989, and in 1993 affiliated with Humility of Mary Health Care Corporation (“HMHCC”), a regional not-for-profit health services provider. Shortly thereafter, HMCCC assumed full sponsorship. In 1997, HMHCC joined Catholic Health Partners (“CHP”), and Laurel Lake became part of CHP. In 2013, CHP divested its senior living/long-term care facilities which included Laurel Lake. This involved a competitive bidding process, and Laurel Lake was the successful bidder to acquire the community with senior bank debt (taxable and tax-exempt) and subordinate tax-exempt bond debt (together, the “2013 Bank and Bond Financing”).
In mid-2016, with interest rates near multi-decade lows and Laurel Lake’s continued successful operation as an independent entity, HJ Sims identified the opportunity for Laurel Lake to explore a refinancing (or modification) of all or a portion of Laurel Lake’s outstanding 2013 Bank and Bond Financing. With the prospect of a significant reduction in interest rates and the opportunity for extension of the existing bank credit commitment, Laurel Lake engaged HJ Sims to explore the specifics of this multi-faceted debt modification opportunity, to structure and to implement the financing.
Given the positive existing relationship between Laurel Lake and its lender, Citizens Bank (“Citizens”), HJ Sims and Laurel Lake approached Citizens to discuss its willingness to refinance or modify all or a portion of the outstanding debt. Citizens expressed strong interest, given the additional financial benefits that the debt refinancing would provide in reducing interest rates and extending the bank credit commitment to further stabilize Laurel Lake’s capital structure. HJ Sims worked constructively with Citizens in the review and negotiation of a financing term sheet focusing particularly on pricing along with maintenance of the existing covenant package.
There were multiple issues to be assessed and successfully addressed in the financing preparation process, including: 1) the most efficient means to implement the transaction; and 2) optimum structuring of the transaction including a) matching the duration of the remaining loan commitment and b) achieving Laurel Lake’s desired interest rate mix, focused primarily on fixed rate financing, involving potential conversion of what had been variable rate debt to a fixed rate and most cost effectively achieving this objective by entering into a new variable-to-fixed interest rate swap.
Acting as Structuring Agent, HJ Sims assessed the various plans and worked effectively with Laurel Lake Management, Citizens Bank and legal counsel to successfully complete the financing on a timely basis.
HJ Sims and Laurel Lake started by analyzing the economics of refinancing or modifying all or a portion of Laurel Lake’s 2013 Bank and Bond Financing, consisting of five separate series (three tax exempt and two taxable). After a variety of refinancing combinations were analyzed and vetted by legal counsel, Laurel Lake decided that the modification of the two series of taxable debt, approximating $32 million, was the most economic financing option, retaining the three series of tax-exempt debt in place. This was determined to be the most efficient means of achieving Laurel Lake’s transaction goals, in particular, reducing the all-in interest rate on the two taxable series, fixing the interest rate on a larger portion of the taxable debt and extending the credit commitment as long as possible (10 years through 2026). This also enabled savings in financing costs, particularly legal fees that would have increased if the tax-exempt debt was included in the refinancing/modification, along with shortening the time required to complete the financing.
Laurel Lake sought the use of fixed (vs. variable) interest rates on the majority of financing, given the historically low level of interest rates and an aversion to any significant increase in variable rates. Accordingly, a key component of financing structuring and implementation involved an assessment of interest rate risk management and hedging strategies. This was focused on the most cost effective approach to hedging of interest rates. Laurel Lake ultimately opted to enter into new swaps for the modification of the 2013 Taxable Series Bank Financing, leaving only $1,500,000 outstanding in a variable rate interest mode. Given the interest rate mix on the outstanding Series 2013 Bank and Bond Financing and a desire to fix interest rates simultaneously, Sims recommended a current starting swap for a portion of the debt and a forward starting swap for the balance of debt.
With HJ Sims’ leadership, the debt modification was fully documented, and all financing committed by February, 2017.
Laurel Lake realized a significant reduction in interest rates and debt service, which enhanced operating profitability and cash flow. The taxable bank financing was extended for 10 additional years (and matching the term of the credit commitment with the term of its interest rate swaps). Finally, a larger portion of the outstanding debt was converted to fixed rate.
Jim Bodine and Mack Welch represented HJ Sims on this transaction. Jim Bodine continued his working relationship with Laurel Lake, having served as lead investment banker on Laurel Lake’s successful membership substitution bid and recapitalization financing in 2013.
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