Cascade Corporation

in a volatile market, sims changes course for nursing home refinancing

introduction

In January, 2008 Herbert J. Sims & Co., Inc. (“Sims”) sole managed a $11,445,000 tax exempt and taxable bond issue for Cascade Corporation located in Middle Township, New Jersey. The new bonds include $9,735,000 of tax exempt bonds and $1,710,000 of taxable bonds. The bond proceeds were used to a) refinance outstanding tax exempt bonds, b) refinance a taxable note and c) fund capital improvements. Cascade owns and operates two 120-bed skilled nursing and intermediate care nursing homes. Both communities provide skilled rehabilitative nursing care, respite care, skilled and intermediate restorative care, physical and occupational therapy, speech, audiology, dental and therapeutic recreation services.

Hospicomm, Inc. manages both nursing homes, Courthouse and Eastern Shore, among six nursing facilities in New Jersey, with a total of 1,014 licensed long-term care beds. Sims has financed these facilities since their construction in 1980, and the 2008 refinancing produced the lowest cost of capital in their history.

financing structure

Cascade’s goal for the refinancing was threefold: a) to reduce the annual debt service payments on its tax exempt bonds, b) to reduce the annual debt service payments on its taxable note and c) to preserve flexibility for future development on the vacant land adjacent to Eastern Shore. The strategy for reducing annual debt service payments included a lower interest rate and a longer maturity and amortization schedule. The new tax exempt bonds contain a 2038 final maturity which is 12 years longer than the maturity of the of the original tax exempt bonds. The new tax exempt bonds also contain a level debt service structure while the original bonds contained a large balloon principal payment in 2011. The new taxable bonds contain a nine year maturity and are structured with level debt service. In contrast, the taxable notes contained an eight year maturity and level principal payments (declining debt service payments).

The original plan of finance developed in 2007 included non-rated, fixed interest rate tax exempt and taxable bonds. When interest rates moved up and quality spreads widened in the fall of 2007, Sims recommended shifting to letter of credit enhanced variable interest rate bonds. Several banks responded to the letter of credit request for proposal prepared by Sims. Four banks attended the site visits organized by Sims and Hospicomm, and three banks provided attractive letter of credit proposals. After reviewing Sims’ comparison of the proposals, Cascade selected Bank of America to provide the letter of credit. The letter of credit contains a seven-year term, and Sims convinced the Bank to include a covenant which permits Cascade to remove from the first mortgage up to 21 acres of the vacant land adjacent to one of its nursing homes. The released land would then be available for future development.

To mitigate its exposure to variable interest rates, Cascade elected to swap the tax exempt variable interest rate for a seven-year fixed interest rate. After the bond issue closed, Cascade worked with Sims and its swap advisor to negotiate with Bank of America an attractive seven-year swap rate for the tax exempt bonds.

the results

The shift to letter of credit enhanced variable interest rate bonds enabled Cascade to achieve its objectives of reducing annual debt service payments, eliminating the balloon payment in 2011 and preserving flexibility to develop a portion of the vacant land adjacent to Eastern Shore. The seven year floating to fixed interest rate tax exempt swap priced at 3.055 percent. The net present value savings from the refinancing equal 8.8% of the refunded principal amount. On an annual basis, Cascade expects to save approximately $1.2 million in each of the next four years. In years five through seven, Cascade expects annual savings of approximately $740,000. These savings are partially offset by higher debt service payments in years eight through thirty. The savings generated in the early years of the new debt service schedule will enable Cascade to build cash reserves and fund improvements of both facilities.