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Sims Restructures and Refinances CCRC without Bankruptcy

by Published On: Sep 20, 2012

Cottage Grove Place in Cedar Rapids, Iowa is a not-for-profit traditional entry-fee continuing care retirement community (CCRC) with 166 independent living units, 19 assisted living residences, and a 39-bed skilled nursing home located on 10 acres. The facility was constructed in 1995 and expanded in 2004. 

All original construction was financed with proceeds of tax exempt bonds. HJ Sims developed a two-phase plan of finance to take advantage of the present interest rate environment and the steepness of the yield curve to significantly reduce debt service and total debt outstanding.

Challenge 

Due to the significant downturn in the U.S. economy that began 2007, along with the dramatic decline in the price and volume of single family home sales, Cottage Grove Place had experienced increasing difficulties attracting new residents, resulting in much lower average occupancy and, consequently, large decreases in cash flow available to pay debt service on outstanding bonds. 

Due to diminished cash flow, the facility had postponed essential capital repairs and improvements, which further challenged recruitment of new residents. Additionally, to conserve cash, the Corporation had increased outstanding accounts payable, including payments to the Corporation’s management company, to levels not considered prudent.

In 2009, cash on hand to pay recurring monthly expenses and debt service had decreased to a point where the Corporation failed to make required monthly payments of principal and interest on the Series 1998 and 2004 bonds from July through September of 2009 and to make required deposits into Repair and Replacement and Operating Reserve Funds during a similar period. Additionally, the Corporation was in default of various debt covenants including days cash on hand and debt service coverage.

Solution

HJ Sims developed a 2-phase plan of finance to take advantage of the present interest rate environment and the steepness of the yield curve to significantly reduce debt service and total debt outstanding. The Cottage Grove Place bonds were held primarily by three institutional bond funds (approximately 71% of outstanding bonds), with the balance held by individual investors. 

Due to a general increase in tax exempt interest rates since these bonds were originally sold, the current value of the bonds as established by independent pricing services was substantially below par.   

Step 1 of the plan of finance required Sims to secure a new tax exempt loan from a financial institution. The interest rate would be set for a period of up to 15 years. By using a shorter period to fix the interest rate, the loan would be at rates well below both the historic rate on the bonds and comparable long-term, non-rated tax exempt bonds in the current market. Sims solicited indications of interest from numerous banks after ordering an appraisal that demonstrated ample loan to value. 

These indications were then negotiated by Sims, and a single bank was selected to fund the tender offer.

Step 2 of the plan of finance consisted of a tender offer for all outstanding bonds at a price above the current bond valuation but well below par value. A tender offer for all outstanding bonds was coordinated with a Tender Agent and the existing bond trustee. 

Sims served as the “dealer manager” for the tender. Given that Sims could assure bondholders that sufficient funds were in hand to pay for the tendered bonds, Sims was able to negotiate prices for the bonds held by institutional and retail bondholders that ultimately significantly reduced the amount of Cottage Grove debt outstanding.

Results 

The tender offer was successful, and all outstanding bonds were retired using the bank loan. Additionally, the bank loan funded all costs of issuance for the tender and loan placement and provided $500,000 for needed capital repairs. Cottage Grove Place did not have to provide any equity at closing.

Debt service was reduced by approximately $1 million annually or 42%. Long-term debt outstanding was reduced by approximately $5 million. A capital repair fund and modest debt service reserve are being funded over a 24 month period from cash flow. 

Debt service coverage and days cash on hand were greatly enhanced.

For more details on this restructuring, please contact your Sims banker or Mark Landreville.

 



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