utilizing a refinancing to mitigate uncertainty and market volatility

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. PHI owns and operates nine continuing care retirement communities (“CCRCs”) in Pennsylvania, one CCRC in Delaware, one CCRC in Maryland, one free-standing nursing home, five independent living facilities, two assisted living facilities and an adult day care center.

challenge

PHI had $16.8 million of outstanding variable rate bonds, insured by Radian Asset Assurance, Inc. (“Radian”). In November, 2007, Sims remarketed PHI’s Radian-insured variable rate bonds in a one-year term rate mode at a rate of 4.25%. Sims remarketed these bonds in an extremely volatile interest rate environment due to the skepticism of municipal bond insurance as a result of certain companies’ heavy exposure to mortgage backed securities. While at the time of the remarketing Radian had little exposure to these mortgage backed securities, in light of this skepticism and a lack of liquidity in the market, Radian-insured variable rate bonds in weekly rate mode were trading at very high interest rates, even for borrowers with strong underlying investment grade ratings. As such, PHI decided at the time to reset its Radian-insured variable rate bonds in a one-year term rate mode to mitigate against its exposure to the extreme interest rate volatility in the weekly rate mode and provide time to allow for the market to either stabilize and/or to determine a prudent strategy moving forward with respect to its Radian-insured bonds.

In the months that followed the successful remarketing of these bonds in a one-year term mode, Radian’s rating continued to decline and the market continued to be extremely volatile. As a result, PHI decided to refinance the outstanding Radian-insured bonds when the one-year term expired.

solution

Sims worked with PHI to solicit proposals from letter of credit banks to enhance a variable rate bond refunding. In conjunction with another financing that Sims underwrote for PHI in June 2008, an Obligated Group was created and a Master Trust Indenture (“MTI”) structure was put into place. The MTI structure allowed for an efficient and expedited financing process for the subsequent refinancing of the Radian-insured bonds, which had to be completed by December 1, 2008.

implementation

The Series 2008C Bonds, issued through the Cumberland County Municipal Authority, were structured as variable rate bonds enhanced with a letter of credit from M&T bank. While PHI does not intend to swap the Series 2008C Bonds, Sims has worked closely with PHI and its Finance Committee over the past few months to implement a strategy to execute interest rate swaps on all of its other existing variable rate debt.

result

On November 19, 2008, the PHI Obligated Group issued $15,685,000 million of tax-exempt, letter of credit enhanced variable rate bonds. Sims placed the Series 2008C Bonds at an initial rate of 1.10%, resulting in an all-in rate, including annual letter of credit and remarketing fees, of less than 2.0%.

“This was our second financing with H.J. Sims this year. With this financing coming at a very volatile time in the financial markets, I was especially appreciative of Sims’ excellent administrative and organizational support throughout the process. It allowed my staff and me much more time to focus on other business needs.” ─ Jeff Davis, PHI’s Chief Financial Officer