Turning a Downgraded Letter of Credit and a Bankrupt Swap Provider Into a Lower Cost of Capital, Extended Maturity and Decreased Debt Service

On September 25, 2009, Herbert J. Sims assisted Havenwood-Heritage Heights (“HHH”) in replacing its outstanding $15,675,000 letter of credit enhanced variable rate bonds with bank qualified bonds. Sims also advised HHH in the termination of its outstanding Lehman Brothers interest rate swap agreement.

HHH owns and operates two not-for-profit retirement communities, Havenwood and Heritage-Heights, located approximately one mile apart in Concord, New Hampshire. Havenwood opened in 1967 and consists of 194 independent living units, 26 assisted living units, and a nursing facility with 29 assisted living beds and 95 nursing beds. Heritage Heights opened in 1980 and consists of 221 independent living units.

challenge

In 2006, HHH issued $29,245,000 of tax-exempt bonds to refinance its outstanding 1995 bonds and renovate its existing facilities. $16,500,000 of the bond issue consisted of variable rate demand bonds enhanced with a letter of credit. Additionally, an interest rate swap fixed the variable rate on the bonds with Lehman Brothers serving as counterparty.

However, in September 2008, Lehman Brothers declared bankruptcy, causing all of their interest rate swaps to go into default. Furthermore, in March 2009, HHH’s letter of credit bank was downgraded, which challenged the remarketing of HHH’s outstanding 2006 variable rate bonds at attractive rates.

solution

As an alternative, the bank offered to refinance the variable rate bonds with bank qualified bonds. Sims assisted HHH in negotiating the terms and in requesting a maturity extension which would decrease annual debt service. Moreover, the bank also offered an interest rate swap on the bank qualified bonds.

HHH and Sims also requested that the issuance costs and swap termination payment be included in the bank qualified bond financing. However, increasing the requested bond amount would add to the financing timeline. Instead, the bank offered a 2-year subordinated taxable loan to fund the issuance costs and swap termination payment.

With Sims’ help, HHH was able to combat a double-blow to its balance sheet: a downgraded letter of credit bank and a bankrupt interest rate swap provider. Now, HHH has obtained a lower cost of capital with an interest rate swap of 2.775% for 5 years and decreased debt service with an extended maturity.