Wellspring Lutheran Refinancing Generates Liquidity and Flexibility
“Approaching this financing, Wellspring Lutheran Services understood we were looking to develop a sophisticated, long range capital plan to serve our organization by positioning us for stability now and growth in the future. The HJ Sims team, led by Aaron Rulnick, provided expert advice, timely support and drove the process to a very successful outcome. Our partnership with Sims exceeded all our expectations.”
– David Gehm, President & CEO, Wellspring Lutheran Services (“Wellspring”)
With the assistance of Sims and the financing working group, Cross Keys was successful in completing the financing in November 2015, as intended. Cross Keys Village achieved its various objectives with a very attractive financing structure for refinancing and new capital, leveraging its credit strength with its existing bank, while adding capacity and a relationship with a new bank.
Highlights include: i) having committed funding for the entire campus expansion/renovation project, including current funding now along with future financing instalments for 2016 and 2017; ii) low all-in cost of financing, combining variable rate financing along with fixed rate financing, including retaining its existing swap on the refinancing and added a forward starting swap (2 Years Forward + 10 Year Term) on what will be 50% of permanent new capital financing; iii) utilizing a draw-down feature, along with bank qualified financing, for all new capital needs to reduce the all-in cost of capital; and iv) maintain desired future flexibility for additional capital needs.
From the beginning of the process, Sims and Wellspring worked towards a financing structure that met the goals of the organization. These goals were:
- Create a long-term financing plan;
- Address refinancing needs for existing commercial loans;
- Reduce interest rate and refinancing risk;
- Generate additional liquidity for the Obligated Group;
- Provide initial capital to fund certain improvements at the communities of the Obligated Group;
- Expand its missions through strategic acquisition opportunities; and
- Create financial flexibility to support and grow Wellspring’s mission.
Sims, Wellspring and bond counsel reviewed the outstanding debt to define the tax status of each previous financing. In addition to the tax status, the financing needed to incorporate new money for renovations and deferred maintenance, a liquidity support fund and the acquisition of a nearby skilled nursing community. Given these conditions, it was determined that taxable bank loan with tax-exempt bonds would be the most effective plan of finance.
Working with Wellspring, Sims created a detailed request for financing package that was sent to regional and national banks. After hosting a site visit, several competitive term sheets were received, and Sims worked with the banks to structure a partnership that would finance both the taxable and tax-exempt components. Two regional banks provided the financing, with the lead bank covering the $31.1 million taxable loan and the other bank purchasing $13.5 million of tax-exempt bonds. While interest rates were favorable for both term sheets, swaps were put in place to provide fixed rates on both financings to mitigate Wellspring’s variable interest rate risk and provide a solid financial foundation for future capital needs and growth. In order to preserve financial flexibility and still take advantage of low interest rates, creative swap structures were utilized. For both financings, 10 year swaps were put in place with a 5 year cancellation option. In addition, the new money for construction would not be swapped until drawn on, allowing Wellspring to take advantage of the current low interest rate environment.
The $44.6 million total taxable bank loan and Series 2015 bond issue closed on October 29, 2015. Specific benefits of the refinancing include:
- Refinancing of Existing Commercial Debt – The refinancing of existing debt into two different tax structures allowed Wellspring to take advantage of lower interest rates on its tax-exempt debt and to lower its current bank loan rates. In addition, the low cost of the bank financing creates and preserves additional debt capacity for future growth opportunities;
- Liquidity Support – As part of the new money in the financing, Wellspring was able to establish a $5 million operating reserve fund to enhance the organization’s liquidity position;
- Flexible swap structures – Swaps were used for both structures, but were made flexible to allow for a cancellation, without penalty, any time after five years providing for future financial flexibility;
- Funding for a strategic acquisition – $3.8 million of the new money was funded by the tax-exempt bonds to acquire a skilled nursing community and expand Wellspring’s mission; and
- Provided Proceeds for Capital Improvements – $8.85 million of the new money will be used to fund renovation projects at several of the communities within the Obligated Group.