sims senior manages $457 million bond issue for a start-up ccrc

introduction

In December 2007, Herbert J. Sims & Co., Inc. (“Sims”) senior managed the largest financing to date for a non-profit CCRC campus when it completed the $457,075,000 financing for NewBridge on The Charles (“NewBridge”). NewBridge, a new full service CCRC being developed by Hebrew Senior Life (“HSL”) on 162 park-like acres in Dedham, Massachusetts, is destined to be the jewel of the HSL network of communities serving the senior population of eastern Massachusetts. NewBridge will have 256 independent living units, consisting of cottages, villas and apartments; 91 assisted living apartments, including 40 for residents who require memory support; and, a 268-bed health care center providing longterm and sub-acute care in a residential neighborhood setting. In addition to the CCRC, the project site will include a Rashi school, which will allow for intergenerational programming on the campus to enhance the lives of both the school children and the CCRC residents.

HSL currently operates six campuses which provide housing and services for seniors, including Orchard Cove, a full service life care community located in Canton, Massachusetts and Hebrew Rehabilitation Center (“HRC”), which operates a 725-bed health care center in Roslindale, Massachusetts. In addition, HRC is home to HSL’s corporate headquarters and The Institute for Aging Research, which is affiliated with Harvard University and operates the nation’s largest geriatric graduate program for research and education.

organizational structure

HSL’s organizational strategic plan includes the future downsizing of its primary health center campus in Roslindale. The concept for NewBridge was partially derived from that strategy. Of the 268 health center beds to be operated at NewBridge, 220 will be chronic care hospital beds, which will be transferred to NewBridge from HRC. When those 220 beds are transferred from HRC to NewBridge, HSL will have the spatial flexibility to begin the reconfiguration of HRC.

Since HRC owns the chronic care hospital licenses for those beds, HRC will continue to operate the beds and will lease the facilities which will house the beds from NewBridge. The lease will provide for payment of rent equal to the gross revenues realized by the operation of the beds, less the operating expenses incurred with their operation. The gross revenues from the operation of the beds will be pledged to secure payment of rent and will therefore be available to pay debt service on the NewBridge bonds.

financing structure

A key factor in the unique nature of the NewBridge financing is the chronic care hospital licensure of 220 of the 268 health center beds. In Massachusetts, the authorization of the primary bond issuers are separated with regard to the types of projects they can finance. Traditionally, Massachusetts Development Finance Agency (“MDFA”) has financed the development of most of the CCRCs. In the case of NewBridge, however, only Massachusetts Health and Educational Facilities Authority (“HEFA”) is authorized to issue bonds for hospitals, which includes the development of the 220 chronic care hospital beds to be developed at NewBridge.

To comply with state regulations and provide a user-friendly financing structure for NewBridge, the bonds of each issuer were issued under a Master Trust, pursuant to individual Loan and Trust Agreements (though the practical terms of the Loan and Trust Agreements are materially the same). Therefore, of the $457,075,000 of bonds issued on behalf of NewBridge, $78,170,000 were issued by HEFA and $378,905,000 were issued by MDFA.

In addition to the unique issuer relationship, the bond structure utilized to finance NewBridge is also unique in the world of senior living finance. Sims worked with HSL for over two years to develop a plan of finance which provided an efficient cost of capital for all of the NewBridge debt, a unique challenge considering the unprecedented size of the transaction. Working with HSL, Sims negotiated several financing alternatives, including a syndicated letter of credit for the entire financing, a private placement of the debt with a large institutional buyer and a public offering of non-rated, fixed rate bonds. In the fall of 2007, when non-rated, fixed rate bond yields began pressuring upward, Sims and HSL negotiated with the letter of credit bank syndicate to improve its proposed cost of capital − a discussion which yielded a unique financing structure for NewBridge.

The bonds were structured and issued as non-rated, variable rate obligations of NewBridge. The bonds were issued initially in a weekly mode, in which the interest rate on the bonds is adjusted weekly to a rate that is equal to the SIFMA Index plus a negotiated spread. All of the bonds were privately placed with a single investor, which will place the bonds into a trust from which it will sell Trust Certificates which are secured by a letter of credit from the bank syndicate, led by Bank of America. For NewBridge, the financing structure is similar to a letter of credit enhanced variable rate bond issue, with the negotiated spread over the SIFMA Index replacing the typical annual letter of credit fee and the need for a remarketing agent being eliminated. Further, since the bonds provide a cost of capital directly tied to the SIFMA Index, NewBridge was able to execute a “perfect” hedge of its variable interest rate risk by entering into a SIFMA-based interest rate swap, which efficiently fixes the rate on the bonds for an intermediate period of time.

the result

The NewBridge financing closed during a very turbulent period in the senior living bond market. While non-rated, fixed rate bond issues became more difficult to execute, NewBridge was able to complete the largest single financing for a CCRC in history and take advantage of an attractive market for variable rate bonds and interest rate swaps. The result was a cost of capital under 4.60%, fixed for 20 months, on $175,000,000 of short-term variable rate bonds and a cost of capital under 5.10%, fixed for 3 years, on $282,075,000 of long-term variable rate bonds.