La Vida Llena - Restructuring

Sims Lowers Cost of Capital on $63.8 Million Bond Issue by Integrating $48 Million Tax-Exempt Advancing Bond Structure With Regional Bank

description

La Vida Llena operates Albuquerque’s only Lifecare CCRC and has grown to include 284 residential living units, 45 assisted living units, 44 nursing beds and 16 memory support units. In March 2009, Sims successfully defined and implemented a bridge financing structure to refinance higher cost fixed-rate bonds, eliminate restrictive covenants and provide the flexibility to implement a more optimal capital structure as future strategic plans were defined. The increase in flexibility and the elimination of the restrictive covenants enabled La Vida Llena to build cash reserves and lower debt service costs which were instrumental in obtaining an investment grade rating from Fitch. Upon completing the bridge financing in 2009, La Vida Llena was able to commence its Health Care repositioning project as well as initiate pre-sales of its 58-unit independent living expansion project in September 2009.

La Vida Llena - Albuquerque, NM

challenges

La Vida Llena desired to finance its expansion project with tax-exempt debt but was concerned about the negative arbitrage and capitalized interest costs associated with a typical bond structure. La Vida Llena also desired the cost of capital benefits of variable-rate debt but wanted a longer term maturity than three to five years. Further, in order to achieve construction cost savings, La Vida Llena desired to proceed with financing at 35% pre-sales. While there was interest from local banks to provide construction financing, it was clear that a participant structure with more than one bank would create higher costs, more restrictions and more arduous approval requirements.

solution

Sims defined and structured a tax-exempt bond structure that included three key components: (1) $45 million advancing tax-exempt bond structure placed directly with a bank; (2) $18.885 million fixed-rate tax-exempt bonds sold institutionally and to Sims retail accounts; and (3) a forward swap with the bank that begins after the interest only period and advancing tax-exempt bonds are fully drawn.

The $45 million of tax-exempt advancing bonds consisted of two maturities: the first maturity is 5 years and is related to the temporary debt to be retired with entrance fees, and the final maturity is 10 years with an amortization of 27 years after the 3 year interest only period.

The fixed-rate bonds of $18,885,000 were structured with maturities of 9-years, 20-years and 30-years. Sims priced La Vida Llena’s BBB rated, fixed-rate bonds 20 basis points lower than a BBB+ rated New Mexico hospital issue priced on the same day. Sims was able to utilize its retail distribution to assist in accomplishing this favorable pricing. The 30 year bond was priced at 6.20%. The fixed-rate cost of capital on the advancing tax-exempt bonds placed with the bank was 4.76%.