reorganizing the capital structure to achieve greater financial strength and flexibility and a lower cost of capital

description

PHI’s history dates back to 1927, when it began serving seniors as the Presbyterian Homes of Central Pennsylvania. Today, PHI’s affiliated corporations serve over 4,000 senior adults annually throughout Pennsylvania and in Maryland, Ohio and Delaware. As a whole, PHI presently owns and operates ten continuing care retirement communities (“CCRCs”) in Pennsylvania, one CCRC in Delaware, one CCRC in Maryland, one free-standing nursing home, four independent living facilities, two assisted living facilities, and an adult day care center.

challenge

PHI has undergone significant growth through recent affiliations. In April 2005, PHI assumed control of Presbyterian Homes in the Presbytery of Huntingdon, which provides independent living, assisted living and skilled nursing in a number of communities in central Pennsylvania. In October 2006, PHI assumed control of Quincy United Methodist Homes, a full-service CCRC also located in central Pennsylvania. In addition, PHI’s unit mix system-wide is heavily weighted towards skilled nursing care. To “right size” its units mix, PHI’s growth strategy includes the addition of independent living units on many of its existing campuses as well as the acquisition of land in key markets for future development. To more efficiently manage its growth, PHI further centralized its management oversight functions and created a vehicle to provide cash and investment management services to its affiliates.

In order to facilitate these changes and future growth, PHI needed to create more stability and flexibility in its capital structure and bond covenants. PHI’s initial financing strategy was to structure the new financing to reallocate its debt composition to include more fixed rate bonds, decrease the amount of variable rate debt and increase the percentage of its debt enhanced with bond insurance. Due to the volatility of the financial markets, the widening of the yield curve, and the collapse of the bond insurance market, PHI had to reevaluate its proposed capital rebalancing plan to adjust to the realities of the current market.

solution

Sims assisted PHI in the formulation of an Obligated Group under a new Master Trust Indenture. This structure strengthened the overall financial profile of PHI’s core communities and created a more efficient and flexible vehicle to finance future growth opportunities. In order to facilitate the creation of the Obligated Group, PHI had to refinance the outstanding bonds for its Kirkland Village campus through proceeds of the Series 2008 Bonds and obtain consents from its existing lenders. In addition, the Series 2008 Bonds provided new money to: (i) finance the acquisition of land in strategic markets for future development; (ii) finance the construction of new independent living units on its existing campuses; (iii) finance renovations and improvements at several of its campuses; and (iv) finance reimbursement to PHI for other capital expenditures and for the acquisition of land.

Sims worked closely with PHI to develop a capital structure that amortized the fixed rate bonds over the first 13 years of the bond issue to take advantage of lower fixed rates at the short to intermediate end of the yield curve. Because of the attractive pricing of the letter of credit, the variable rate bonds, with an all-in-rate under 4.0%, were amortized from 14 through 30 years. The debt service for the Series 2008 bonds was layered in with PHI’s other outstanding bonds.

implementation

The Series 2008 Bonds, issued through the Cumberland County Municipal Authority, were structured with a combination of variable and fixed rate bonds. The fixed rate bonds consisted of serial bonds from 2009 through 2012 and 2018 through 2021 and a term bond due in 2017. Sims also worked with PHI to develop a tiered swap strategy, whereby PHI swapped an aggregate of $30 million of its variable rate bonds to fixed in $10 million increments for three, five and seven years. The $15 million balance of the variable rate bonds is currently unhedged.

Standard & Poor’s S&P assigned an underlying “BBB+” rating for the Series 2008 Bonds and affirmed the underlying “BBB+” rating for Presbyterian Home, Inc.’s outstanding bonds, despite the issuance of approximately $25 million of new debt for various capital projects.

result

On June 5, 2008, the Presbyterian Homes Obligated Group issued $62.415 million of tax-exempt bonds structured in two series:

1. 1. $17.4 million of “BBB+” (S&P) serial and term bonds with a final maturity of January 1, 2021 and yields ranging from 3.10% to 5.45%; and
2. 2. $45.0 million of long-term, variable rate bonds with a final maturity of January 1, 2038 and backed by a seven-year letter of credit from Bank of America.

The all-in rate on the variable rate bonds, including the underlying swap rate and the annual letter of credit and remarketing fees, was 3.44%, 3.72% and 3.91% for the three-, five- and seven-year swap terms respectively.

Jeff Davis, PHI’s Chief Financial Officer commented, “This was our first bond transaction with Herbert J. Sims, and we could not be more pleased with the results. The integrity and support of the Sims staff from the beginning of the transaction through closing was excellent.”