sims senior manages $175 million of non-rated bonds for start-up ccrc on non-recourse basis with no equity

description

Ingleside at King Farm (the “Project”) is a start-up continuing care retirement community which is being developed in an existing planned community in Rockville, Maryland. The Project will be owned and operated by King Farm Presbyterian Retirement Community, Inc. (“King Farm”). King Farm is affiliated with two existing CCRCs: Ingleside at Rock Creek, previously known as the Presbyterian Home, located in Washington, DC; and Westminster at Lake Ridge, located in Lake Ridge, Virginia. Since each of the existing CCRCs operates on a stand-alone basis, King Farm needed to be financially viable without any support or equity from the existing CCRCs or the Foundation.

The first phase of the Project will consist of 242 independent living apartments, 35 assisted living units, and 45 skilled nursing beds, all housed in a seven-story mid-rise building. King Farm, with the support of New Life Management and Development, pre-sold 176 units (73% of the independent living units) between February and November of 2006 (17 units per month).

Exterior Building Rendering

challenge

Given the “flat” yield curve, where there is little “spread” between short-term and long-term interest rates, King Farm wanted to issue all fixed rate bonds in lieu of financing the short-term debt with the more traditional structure of letter of credit enhanced variable rate bonds. King Farm appealed to Sims to come up with a structure where it could benefit from the flexibility of the letter of credit structure to redeem bonds from the initial entrance fee receipts and lock into low fixed rates.

solution

Sims introduced a new financing structure called Entrance Fee Principal Redemption Bonds^SM (“EFPRB^SM”). Like letter of credit enhanced variable rate bonds, the EFPRBs will be repaid from the initial entrance fee receipts on a planned principal payment schedule based upon the expected fill-up of the Project, but the interest rate is fixed and issued without any credit enhancement. If insufficient entrance fees are received to make the planned principal payments, it does not trigger an event of default; the bonds are just repaid once the entrance fees are received. Conversely, if the Project fills-up more quickly than anticipated, the EFPRBs may be optionally redeemed in excess of the planned principal payments at par, thus providing the flexibility of the variable rate bonds but with a fixed rate.

implementation

Sims obtained approval from the Maryland Health and Higher Educational Facilities Authority to implement this unique financing structure for a start-up CCRC. The EFPRBs were structured as $120 million non-rated fixed rate bonds in two terms with maturities of 6 and 10 years. Sims’ banking and sales force worked diligently to educate investors about the new structure and obtained significant interest from both institutional and retail investors. In addition, Sims was able to obtain 100% financing for the project with no equity or support from the existing communities or Foundation.

result

King Farm issued $174.6 million of tax-exempt non-rated bonds structured in two series:

1. $120.0 million of short-term, non-rated fixed rate bonds with 6- and 10-year maturities and yields to maturity ranging from 4.75% to 4.988%
2. $54.6 million of long-term fixed rate bonds with 10-, 20- and 30-year maturities and yields ranging from 5.00% to 5.35%
3. Average coupon of 5.17%

Sims responded to its client’s desires to issue all fixed rate bonds and obtain a low cost of capital with the flexibility to repay the short-term bonds without any pre-payment penalties. The result was the largest non-rated bond issue ever underwritten for a start-up CCRC at record low interest rates.