By Melissa Messina, SVP at HJ Sims
With how unpredictable the last year has been, it would be foolish to believe that we can reasonably predict what will happen in the next five years as it relates to Life Plan Community financing and capital markets as a whole.
However, we have learned in recent months that communities can implement innovative financing tactics to create operational cashflow in this current market situation. Here are some thoughts, considerations and possible opportunities for your organization.
Setting the stage: regulatory considerations
A good bit hinges on how this administration approaches private activity bonds (we expect favorably) and the reinstatement of tax-exempt advance refundings (we hope favorably, but are not sure that this will rise to the top of their agenda).
If this administration does not reinstate tax-exempt advance refundings, and tax-exempt yields continue to hover near historic lows, then we expect taxable bond issuance to continue its march towards a greater market share, and refinancings to be achieved primarily through the means noted in our recent white paper. If tax-exempt yields rise sharply, and it appears as though the marginal tax rates will increase, we expect that investors will continue to demand tax-exempt paper and the appetite for taxable paper may wane, which demand would be satisfied if tax-exempt advance refundings are reinstated.
Four recent successes using innovative financing strategies to create cash flow for senior living providers
The Tax Cuts and Jobs Act of 2017 (the 2017 TCJA) had an enormous impact on the municipal bond market with the elimination of advance refundings. In 2018, HJ Sims identified alternative strategies in the absence of tax-exempt advance refundings. Those strategies included:
(1) Cinderella bank-held bonds
(2) Taxable fixed rate advanced refundings
(3) Forward refundings
(4) Tender offers
The use of Cinderella Bonds aims to secure an advance refunding that is at first taxable and converts to tax-exempt when permitted. It was applied to the financing of Marshes of Skidaway Island (The Marshes) in GA.
In 2020, we approached The Marshes noting that a bank-placed Cinderella refinancing of outstanding fixed-rate bonds would provide significant savings. We successfully closed the $47.1 million financing in December 2020, saving approximately $1.14 million annually and $15.36 million, in the aggregate, through a bank financing.
Westminster Communities of Florida, the largest provider of Life Plan Communities in the State of Florida, employed HJ Sims to utilize a taxable fixed-rate advance refunding of bonds issues to acquire Glenmoor after its successful turnaround.
We analyzed bank-held and fixed-rate bond advanced refundings, with a rapidly growing taxable fixed rate bond market. Westminster proceeded with a taxable advanced refunding and tax-exempt new money issuance to fund upcoming capital projects. HJ Sims procured strong investor interest in the successful $107,360,000 transaction.
A Forward Refunding approach was utilized with Peconic Landing at Southold (Peconic) in New York state.
This strategy utilizes tax-exempt fixed rate bonds priced on a present-day basis, but not delivered and “closed” until 90 days prior to the call date of the refunded bonds. In 2019, we discussed potential refunding of Peconic’s bonds. The elimination of tax-exempt advance refundings meant immediate access to the tax-exempt market wasn’t possible, and the current BBB- rating made access to the taxable bond market impractical. HJ Sims helped facilitate a forward refunding, securing pricing on a 20-year term on the refunding in late 2019 and saving Peconic more than $300,000 in annual debt service with the ultimate settlement occurring in November 2020 amid the COVID-19 pandemic.
A Tender Offer financing was implemented for the Maryland Obligated Group of Asbury Communities (Asbury).
In 2018, Asbury Maryland Obligated Group’s capital stack included a series of outstanding bonds that a previous investment banking partner had placed directly with an institutional investor without an optional call feature and with a balloon payment. HJ Sims negotiated an exchange of the bonds at a purchase price for a new series of bonds, extending the amortization, providing additional years of repayment and reducing the overall debt burden.
The 2017 TCJA changed the borrowing landscape for 501(c)(3) organizations and especially senior living providers. As the new administration and Congress identify and implement their fiscal policies, financiers such as us will continue to help Life Plan Communities in navigating the ever-changing market landscape and continually monitor market response to new laws and update the industry of developments and trends. As legislation in both houses of Congress presently aims to reinstate tax-exempt advance refundings, we will continue to monitor its progress and provide updates to LPCs.
Past performance does not guarantee similar future results or success.