Sims Refinances Debt For LeadingAge
Innovative Bank Financing Achieves Debt Service Savings and Budgetary Certainty through 2028…
LeadingAge is helping its members create the future of aging services. Founded in 1961, the organization represents over 6,000 mission-driven, not-for-profit nursing homes, life plan communities, assisted living and senior housing providers and a range of home and community-based service providers. In 1999, LeadingAge financed a headquarters building in Washington, D.C. through the issuance of $11 million of tax-exempt bank qualified District of Columbia Revenue Bonds, Series 1999 and a $5.3 million taxable senior promissory note. The 1999 obligations were later refinanced by LeadingAge in 2005, with those obligations redeemed with direct-purchase bank debt in 2010. In connection with its tax-exempt obligations, LeadingAge entered into an interest rate swap agreement in 2012 to lock-in a synthetic fixed-rate of 2.21% through October 1, 2017. In 2016, with interest rates near historically-low levels, and given the expectation of a higher interest rate environment when the existing bank term expires, HJ Sims (“Sims”), as financial advisor, assisted LeadingAge in exploring options to refinance its outstanding debt to generate savings.
In late 2015, Sims developed a comprehensive Request for Proposals (“RFP”) that was distributed to 16 commercial banks in the Washington D.C. and Mid-Atlantic areas. A few weeks later, a site visit was held in which banks had the opportunity to tour the LeadingAge headquarters building, meet management and staff and attend a presentation providing additional background on the organization. Seven proposals were ultimately received, with the winning bank selected by the LeadingAge Board in January 2016 to provide a 12-year tax-exempt term loan issued through the District of Columbia as well as a five-year direct purchase of taxable notes. At this stage, LeadingAge faced the following financing challenges: 1) identifying the most effective strategy to maximize debt service savings, including interest rate hedging alternatives; 2) minimizing transaction costs, which would be funded with taxable debt and thus subject to a higher rate of interest; and 3) reducing the time required to execute the refinancing. With respect to interest rate mode, based on the prevailing market environment, viable alternatives included traditional fixed-rate debt, unhedged variable-rate debt and synthetic fixed-rate debt.
In February 2016, Sims collaborated with the Working Group to develop an innovative reissuance strategy that would achieve LeadingAge’s debt service savings objective without being considered a refunding. As such, the existing bond indenture would be amended and restated to provide for a new mode through which the tax-exempt obligations might be transferred to a new bank. Although this transaction would be considered a new issuance of debt for tax purposes, because it was not a refunding, the following key financing objectives would be achieved: 1) reduction in transaction costs compared to a traditional refunding; and 2) shortening of the transaction execution process, as formal approval from the District of Columbia would not be required. With respect to interest rate mode, Sims advised LeadingAge to issue $2.6 million of taxable notes as unhedged floating-rate debt and $11.09 million of tax-exempt bonds as floating-rate debt hedged with either a synthetic fixed-rate swap or interest rate cap, with the taxable notes fully amortizing first given the higher bank spread. Sims developed a comprehensive presentation for the LeadingAge Budget and Finance Committee outlining the mechanics and risks associated with each hedging strategy, after which it was determined that LeadingAge would hedge its tax-exempt bonds with a 12-year synthetic fixed-rate percentage of LIBOR swap.
The LeadingAge Working Group prepared for a transaction closing on May 26, 2016. Sims, in partnership with Kensington Capital Advisors, negotiated an equitable termination fee with respect to the existing swap on LeadingAge’s tax-exempt bonds. Furthermore, although the term of LeadingAge’s tax-exempt refinancing debt was longer than the bonds redeemed, LeadingAge was still able to secure a lower synthetic fixed-rate of 2.194%. Complementing the budgetary certainty and debt service savings achieved from the tax-exempt refinancing, the taxable notes were structured with a one-year extension and bullet maturity to provide LeadingAge with additional annual cash flow savings through 2021.
“Thank you for your skillful guidance throughout the refinancing journey. I, along with the entire Budget and Finance Committee, am grateful for your help, expertise and participation. We’re delighted with the outcome, which will hold LeadingAge in good stead for the next twelve years.”
– Katie Sloan, CEO, LeadingAge
“A tremendous thank you for your consummate professionalism and thoughtful advice throughout the refinancing process. Your leadership and experience was invaluable in ensuring a successful refinancing outcome for LeadingAge.”
– Jean Van Hyning, Director of Finance, LeadingAge