Sophia Snow House

Refinancing Letters of Credit with Bank Qualified Bonds

On September 15, 2009, Herbert J. Sims & Co., Inc. refinanced Sophia Snow House (SSH)'s existing letter of credit bonds by placing a new, tax-free, bank qualified bond issue to a lending institution.

In 2004, Roxbury Home for Aged Women, SSH’s parent, replaced an assisted living facility located in West Roxbury, Massachusetts with a new building containing 36 assisted living apartments and 66 independent living units. The assisted living component is operated by Sophia Snow House, Inc., while the independent living component is operated by Sophia Snow Independent Living, Inc. (SSIL) Sims worked with SSH to issue $10.610 million of tax-exempt, letter of credit enhanced variable rate bonds through the Massachusetts Development Finance Agency to finance the construction of the replacement facility.

Sophia Snow House - West Roxbury, MA

challenge

As of August 2009, approximately $6 million of the 2004 bond issue remained outstanding. The letter of credit enhancing the 2004 bonds was set to expire in August 2009. Due to the difficult economic environment, the letter of credit renewal with SSH’s current bank would entail an increased annual fee. Wishing to avoid the higher cost of capital, SSH sought Sims’ help to seek out alternative bank proposals. SSH also wished to limit SSIL’s participation as guarantor and to maintain the relationship with its current investment manager of the parent’s endowment fund.

solution

Sims immediately created a request for proposal to send to banks. However, Sims understood that the usual list of banks were capital constrained, tightening their credit criteria and making it increasingly difficult to obtain letters of credit.

As such, Sims developed other options for SSH. The American Recovery and Reinvestment Act of 2009 encourages banks to purchase tax-exempt debt. Smaller banks could now provide proposals to refinance SSH’s debt by purchasing bank qualified bonds. Sims expanded its search to include these smaller banks.

As banks responded with bank qualified bond proposals, Sims led the negotiations to obtain attractive fees and manageable financial covenants. The winning bank could not have issued a letter of credit but was pleased to purchase the bond issue. The smaller bank limited SSIL’s guarantee and permitted the endowment to remain with its current investment management company.

For borrowers with letters of credit coming due, contact a Sims banker to show you how to take advantage of bank qualified, tax-free bonds to lower your interest costs and extend your maturities.