HJ Sims

LeadingAge

Utilizing alternative bank structures to provide a more stable capital platform

Description

On September 1, 2010, HJ Sims (“Sims”) closed a $15 million reissuance and refinancing for LeadingAge (formerly AAHSA). LeadingAge is a national association comprised of over 5,700 member organizations, all of which are non-profit providers of senior services, including continuing care retirement communities, nursing homes, assisted living facilities, independent housing projects and home-and-community based service organizations.

Proceeds of the 2010 financing were used to replace the letter of credit on LeadingAge’s outstanding tax-exempt Series 2005A Bonds with bank qualified bonds and refinance its taxable Series 2005B Bonds with a term loan. The Series 2005 Bonds were initially issued to refinance LeadingAge’s 1999 debt that was used to finance the construction of its national headquarters building in Washington, DC.

Challenge

The purpose of the 2010 financing was to replace the letters of credit on the Series 2005A and 2005B Bonds which expired on September 9, 2010 and to put a more stable financing structure in place. Given the instability of the letter of credit bank on the Series 2005 Bonds, which culminated in its acquisition by an international bank, the Series 2005 Bonds were often remarketed at a “premium” relative to the underlying tax-exempt and taxable indices. Despite that fact, however, the pricing on the letters of credit for the Series 2005 Bonds was low, and when combined with interest rate swaps on the Series 2005 Bonds, the all-in-rate was very attractive. Since the banking landscape in 2010 had deteriorated significantly since the 2005 financing, LeadingAge was concerned that it was facing a much higher cost of capital upon the expiration of its letters of credit as well as more stringent covenants. In addition, given today’s commercial real estate market, there was a concern that LeadingAge could not meet the current loan-to-value standards required by commercial banks.

Solution

Sims coordinated a comprehensive RFP process that resulted in the receipt of term sheets from seven commercial banks. After multiple rounds of negotiations with the banks, Sims secured a commitment to purchase 7-year tax-exempt bank qualified bonds which replaced the Series 2005A Bonds and to provide a 10-year taxable term loan which refinanced the Series 2005B Bonds.

The most significant challenge of the 2010 financing resulted from a significant reduction in the appraised value from the 2005 financing which was due to a more conservative valuation approach as well as a decline in the commercial real estate market. As a result, LeadingAge was unable to meet the bank’s initial loan-to-value requirement. Sims worked with the bank to bifurcate the security and collateral for the tax-exempt bank qualified bonds and the taxable term loan in order to satisfy the bank’s loan-to-value and credit requirements.

Not only did the 2010 financing result in a more stable debt platform which eliminated the remarketing risk and provided longer terms than the 2005 financing, but it resulted in lower debt service than the 2005 financing and preserved a flexible and attractive covenant structure. Moreover, by modifying the bond documents for the Series 2005 Bonds to add a new mode for the bank qualified bonds, LeadingAge was able to “reissue” instead of “refinance” the Series 2005A Bonds which resulted in significant savings in the costs of issuance for the 2010 financing.