sims helps crane’s mill retain its rating despite a major expansion doubling its debt loan; result is a low cost of capital

On July 10, 2008, Sims closed a third tax-exempt bond financing for Crane’s Mill, a CCRC in West Caldwell, NJ, which provided funding for an independent living unit expansion and renovations to its assisted living units to convert 60 assisted living units to 48 assisted living units and 17 dementia assisted living units.

Crane’s Mill - West Caldwell, NJ

description

Lutheran Social Ministries of Crane’s Mill (“Crane’s Mill”) is a CCRC, sponsored by Lutheran Social Ministries of New Jersey, which opened in 1998 with 206 independent living units, 60 assisted living units and 66 nursing units. The original construction was financed by Sims in 1997 with a tax-exempt bond issue, and the bonds were refinanced by Sims in 2005. For the advance refunding, Sims secured a “BBB-” investment grade rating from Fitch and sold a combination of fixed rate bonds and credit enhanced, variable rate bonds. As Crane’s Mill had a waiting list for independent living units, an expansion of 70 new independent living apartments and 10 new cottages would allow the CCRC to gain incremental revenue with limited increases in expenses and would help finance improvements at its facilities in the health center.

challenge

With the expansion and renovation, Crane’s Mill was more than doubling its debt load. Maintaining its investment grade rating was a concern, given the construction and fill-up risk, as well as the additional debt load. In addition, securing low cost credit enhancement was important to the financing and posed some challenges as banks were experiencing limited access to capital allocations for senior living.

solution

Fitch representatives met with management at Crane’s Mill, and Sims provided Fitch with information on Crane’s Mill’s financials, market area and marketing program that mitigated some of the risks described above. In addition, the financing was structured such that $26.4 million of Crane’s Mill debt is expected to be paid off within three years with entrance fees received from the new apartments and cottages. This expected reduction in debt also helped Fitch get comfortable with maintaining the rating of “BBB-” with a stable outlook.

Through a competitive process, Sims secured three proposals for credit enhancement of the 2008 bonds and the outstanding 2005 bonds, as well as construction loan proposals for the cottages. Crane’s Mill selected TD Bank, N.A. to provide the credit enhancement for the bonds and the construction loan for its low cost of capital and flexible covenants. By substituting Crane’s Mill’s existing letter of credit on the 2005 bonds with TD Bank, Crane’s Mill realized significant savings on its credit enhancement fees.

result

Crane’s Mill’s 2008 financing included:

• $16.255 million of long-term fixed rate bonds with an 30-year interest rate of 6.125%
• $22.4 million of short-term, variable rate bonds enhanced with a TD Bank, N.A. letter of credit with a 27-month swap rate of 3.03%
• $4 million construction loan which solely funded the cottage financing

In addition, T.D. Bank replaced the existing letter of credit on the $13.99 million of Series 2005 bonds outstanding.

As the financing had many moving parts, Francis Kardos, Chief Financial Officer of Lutheran Social Ministries of New Jersey, recognized that “the need for frequent and widespread communication on a financing team is paramount. There are so many participants in the process of due diligence, and Sims was an excellent quarterback, ensuring that all parties were working together toward the goal of a successful financing.”