Sims Secures Long-Term, Low-Cost Bank Financing for Philadelphia CCRC
The Philadelphia Protestant Home (“PPh”) operates a continuing care retirement community (“CCRC”) in the Lawndale neighborhood of Northeast Philadelphia, providing housing, healthcare, and other services to residents through the operation of 266 independent living units, 175 personal care units and a 126-bed nursing facility. Since its opening over 100 years ago, PPh has remained steadfast in its commitment to provide a caring senior living community that affords residents with the highest quality of life. Located in the “CCRC capital of the world”, with five CCRCs less than seven miles away and 45 in the Philadelphia/Delaware Valley area, a critical component of PPh’s ability to deliver the best level of care for its residents while remaining affordable and competitive entails taking advantage of refinancing opportunities and financing capital projects in favorable market conditions. Weeks before the 2008 Financial Crisis, PPH issued $29.9 million of variable rate bonds (“2008 Bonds”) through the Philadelphia Authority for Industrial Development (“PAID”) to refinance three series of outstanding debt and fund capital improvements. The 2008 Bonds were secured by a letter of credit as well as a senior lien on PPH’s gross revenues and first mortgage lien on PPH’s property and equipment. Additionally, to further reduce the uncertainty associated with variable-rate debt, PPh entered into two interest rate swap agreements to effectively lock-in a fixed interest rate on $16 million of the 2008 Bonds (the “2008 Swaps”). In 2015, with interest rates still near historically-low levels, HJ Sims (“Sims”), as financial advisor to PPh, developed a plan of finance contemplating the issuance of $23 million of direct-placement bank bonds (“2015 Bonds”) through PAID to refinance the 2008 Bonds and fund the termination payment with respect to the 2008 Swaps, with remaining proceeds of approximately $1 million to be utilized for capital improvements.
Sims led a comprehensive bank solicitation process targeting commercial banks in the Mid-Atlantic Region. A few weeks after the Request for Proposals (“RFP”) was distributed, a site visit was held in which banks had the opportunity to tour the PPh campus, meet management and staff and attend a comprehensive presentation providing background on the organization and details regarding the RFP. Banks also learned that an important amenity for PPh residents is the full service bank branch operated on campus five days a week. At this stage, PPh faced the following financing challenges: 1) garnering interest from financial institutions in providing the refinancing loan and supporting the operation of an on-site branch, which is considered an unprofitable ancillary business in today’s environment; 2) the potential for rising interest rates at the end of year; and 3) the hectic holiday season, which often makes it difficult to execute transactions from a logistical standpoint.
A total of 19 bankers from eight banks attended the site visit and expressed an initial interest in responding. PPh ultimately received six competitive proposal responses, with the winning bank selected to provide a 12-year synthetic fixed-rate term loan. Sims prepared a financing timetable that would allow PPh to capitalize on year-end market dynamics, understanding that the year-end spike in interest rates was likely temporary and offered the benefit of a lower termination (“unwind”) payment with respect to the 2008 Swaps. Sims advised PPh to issue the refunding loan in an unhedged variable-rate mode prior to year’s end, thereby terminating the associated 2008 Swaps in a more favorable interest-rate environment. Following the closing of the 2015 Bonds, PPh planned to lock-in a synthetic fixed-rate on the debt provided that interest rates were lower. While this plan of finance seemed to address unfavorable prevailing market dynamics, PPh now faced additional obstacles, including: 1) closing the transaction, including negotiating the swap and letter of credit termination provisions, in an extremely compressed 3-week timeframe and 2) receiving bank consent to issue the entire refunding loan on an unhedged variable-rate basis, which was prohibited under existing loan documents.
The PPh working group prepared for a transaction closing on December 31, 2015. Sims leveraged its existing relationship with the swap counterparty and letter of credit provider to negotiate lower transaction fees, reducing PPH’s expenses by nearly $40,000. Additionally, the optimal timing with respect to the termination of the swap resulted in an unwind value that was nearly $200,000 lower than the amount estimated only weeks earlier. After closing the Series 2015 Bonds on schedule, the bond market rallied during the first week of 2016 as expected. By anticipating this change in market conditions and effectively preparing to execute the swap, PPh was able to lock-in an attractive 12-year synthetic fixed-rate of under 2.50%. Furthermore, Sims successfully negotiated with the bank that they would operate a full-service banking branch on the PPh campus five days a week for at least the next three years. “…despite the condensed time frame, the refinancing process directed by Sims went well and our goal of moving away from a letter of credit…as well as improved financial covenants was met” –Dave Wicker, Chief Financial Officer, Philadelphia Protestant Home