Hills & Dales General Hospital (H&D) engaged First River Advisory in May 2005 to arrange financing for a major expansion and renovation project. H&D, located in Cass City, Michigan, represented First River Advisory’s first such assignment for a critical access hospital (CAH). Typical of CAHs, H&D exhibited weak credit characteristics, including low liquidity. Compounding the credit issues was a related senior living facility whose cash flow shortfalls were being funded by H&D.

First River Advisory’s first task was to assist H&D with completing its Certificate of Need (CON) application. As in its other engagements, First River Advisory supplied all of the input necessary to address the capital financing questions on the application. First River Advisory also persuaded the State CON bureau to accept its letter concerning the availability of financing even though First River Advisory is not a bank, investment banking firm or other financial institution.

Prior to the completion of these related transactions, H&D had five debt instruments outstanding. Though none of these debt instruments’ balances were large, H&D’s debt structure complicated the issuance of new debt to finance the project. All subjected H&D to one or more risks, including variable interest rates, “balloon” payments and short amortization schedules. Moreover, their overlapping collateral structures would not have permitted a new lender to have any meaningful security. It became apparent to First River Advisory that all of this existing debt would have to be refinanced and/or restructured.

Because the CON would not be issued until November, the timing of the financing would be critical. Unless the financing could be completed by mid-December, the commencement of construction would have to wait until spring. During the planning phase of First River Advisory’s engagement, H&D expressed a preference for long-term, fixed-rate financing. Local banks expressed an interest in providing financing, but their amortization periods were limited to 15 years, not nearly as long as the useful life of the assets to be constructed.

First River Advisory determined that three approaches which achieved H&D’s objectives would be viable. Two involved firms which would purchase long-term, fixed-rate bonds, deposit them in a grantor trust, and then securitize beneficial ownership interests in the trust. First River Advisory arranged for principals of these firms to visit with H&D’s representatives, and both eventually submitted formal proposals. The other approach involved a private placement with a single institutional investor which commonly purchases “high-yield” hospital bonds. Even without any sort of commitment on the part of such an investor, First River Advisory’s keen understanding of this market segment and close continual contact with bond analysts provided sufficient comfort to H&D’s management and governing board that this approach would not only be viable, but superior to the others. H&D’s board adopted this financing plan on September 30, an institutional investor committed to purchase bonds by the end of October, and the transactions were closed in mid-December. First River Advisory meshed the institutional investor’s purchase of long-term, fixed-rate bonds (the Series 2005A Bonds) with a bank’s purchase of fixed-rate bonds maturing in 2020.

First River Advisory devised an intricate financing plan which addressed multiple issues, such as:

• the necessity of delivering tax-exempt “bank-qualified” bonds to the bank;
• the need to clear all existing mortgage liens and security interests relating to the outstanding debt; and
• the “non-exempt” nature of certain assets which had been financed by a conventional bank loan, and the necessity that any refunding debt be in the form of some taxable instrument.