Cain Brothers, a health care investment banking firm, recently announced the closing a of $98 million plan of finance to fund a large expansion project for Westminster Manor a continuing care retirement center (CCRC) located in Austin, Texas. The complex financing combined short-term tax-exempt bank qualified bonds, a related interest rate swap, a taxable bank construction loan, and long-term tax-exempt fixed rate bonds to fund the CCRC’s campus expansion.
Westminster Manor is an existing, not-for-profit CCRC that was established more than 40 years ago and currently has 256 residential apartments and 90 nursing beds. Life Care Services has managed the CCRC for the past 28 years. The project will add 75 new residential apartments and a 107-bed health care center that will include assisted living, memory care, and skilled nursing beds. Cain Brothers secured a credit rating of BB+ from FitchRatings that documented the rationale for the rating and described its credit analysis for interested investors.
Bill Pomeranz, Managing Director of Cain Brothers said, “The CCRC’s financing structure was more complicated to structure and implement than an ordinary fixed rate bond issue, because rights of the short-term lenders had to be coordinated with those of the long-term bondholders. However, the results will provide long-term interest rate savings to Westminster Manor and its residents. Securing a cost of capital for the project of 6.89% and a permanent capital structure that is comparable to investment grade medians, because it is favorably priced and appropriately leveraged, is a result we are proud to have delivered to our client.”
The use of short-term bank qualified bonds and the construction loan minimized the interest rate and the current negative arbitrage that plagues most fixed rate bond deals in today’s market environment. The average cost of the combined funding is 6.89%, which compares quite favorably to an all fixed rate bond structure. The CCRC’s short-term bank funding, which will be repaid from $35 million anticipated new entrance fees, consists of $23.4 million tax-exempt bank qualified bonds with a cost of capital of 4.135% and a $10.6 million construction loan with a current cost of capital of 4.75%. As part of the Series 2010 Bonds, Cain Brothers incorporated a $5 million six-year bond with a three-year early call option. This will allow Westminster to use excess cash reserves to reduce its debt obligation but not place undue pressure on the CCRC to utilize cash if the project opening is delayed. Cain Brothers also served as swap advisor to Westminster Manor in the negotiation and pricing of a $23.4 million interest rate swap to manage the interest rate risk on the 2009 Bonds.