Silver Maples of Chelsea (SMOC) is a senior living organization jointly sponsored by Chelsea Community Hospital and United Methodist Retirement Communities, both First River Advisory clients.  First River Advisory was retained by SMOC to arrange financing for an $11 million project involving the expansion and renovation of its independent- and assisted-living units.

The SMOC Board and management remained satisfied with the variable-rate demand bond (VRDB) transaction which provided the financing for the original project in 1996.  The letter of credit (LOC) which backed the VRDBs had been renewed by the bank, which had also reduced the annual fee and released the two sponsors’ guarantees.  While the relationship with the bank remained strong, there was some doubt that the bank would agree to an extended amortization period which would correlate well with the useful life of the facilities.

First River Advisory’s principal role was to identify and cultivate viable alternatives to VRDBs backed by the incumbent bank’s LOC.  First River Advisory approached this role along two dimensions:

1. by opening discussions with other banks, one of which was a new entrant into the market; and
2. by contacting a bond insurer and a rating agency.

Even if neither a bond insurance policy nor an investment-grade rating could be obtained, the issuance of long-term, fixed-rate bonds remained a genuinely viable alternative because of the tremendous appetite securities of this nature among institutional “high-yield” investors at yields in the mid- to upper-five percent range.  Such bonds featuring a long amortization schedule, SMOC’s highest priority, would have been readily marketable.  SMOC’s preference for variable-rate debt could still have been satisfied by entering into a fixed-to-variable interest rate swap or, if a bond insurance policy were to become available, by issuing VRDBs or auction-rate securities.

The availability of viable alternatives, compounded by First River Advisory’s reputation for fashioning imaginative solutions and bringing them to fruition, motivated the bank to deliver an aggressive proposal.  The bank’s proposal exceeded SMOC’s expectations by satisfactorily addressing every “must have” and substantially all “nice to haves.”  With respect to SMOC’s highest priority, First River Advisory negotiated a 30-year amortization schedule which encompassed the existing debt.  This amortization schedule was so favorable that even though SMOC’s outstanding debt would double, SMOC’s annual principal repayments over the next several years would be reduced.

During the implementation of the financing, it became essential for First River Advisory to address an adverse appraisal.  Working within the parameters established by the bank, First River Advisory devised a creative solution which lessened the impact on SMOC considerably.

Because of First River Advisory’s comprehensive scope of services, the role of the investment banking firm was extremely limited.  First River Advisory negotiated the investment banking firm’s proposed compensation of $3.25 per thousand principal amount of bonds to $2.00, a 38 percent reduction representing savings to SMOC of over $26,000.  First River Advisory also pressed the investment banking firm to act as an underwriter rather than as a placement agent so that SMOC would not be at risk for the failure of the firm’s customers to pay for their bonds.

Reference:
Jerry Wilczynski, Chief Executive Officer
(734) 475-4111
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