May 2, 2011

Aviv Centers for Living closes on $50 million of letter-of-credit-backed tax-exempt bonds

Aviv Centers for Living (Aviv) closed today on $50 million in tax-exempt financing that will centralize its skilled nursing and assisted living facilities onto a single campus. The transaction is an anomaly in a year that has seen few bond issues for non-investment grade healthcare providers come to market. Aviv will save an expected $8.5 million in interest costs over the first five years of the bonds because of the letters of credit Aviv procured from its banks.
Aviv, a provider based on Boston’s North Shore, currently offers 130 units of assisted living on its Peabody, Mass., campus and 176 skilled nursing beds in nearby Swampscott. Other Aviv services include its adult day health center and community based services, including home health and geriatric care management.
The financing will fund construction of a new 144-bed replacement skilled nursing facility on the Peabody campus. The bonds also refinance about $17 million in outstanding debt on the assisted living facility. The new Waldfogel Health Center will consist of nine 16-bed households, each with its own dining room, living area and dedicated staff. It will also offer adult day services and an early childhood center, and the Jewish Historical Society will showcase the area’s Jewish heritage in exhibits throughout the buildings. Though Aviv is decreasing the number of skilled nursing beds it offers, it expects to double the number of patients and residents it serves annually because its sub-acute unit will discharge many patients back to the community.
“Each percent less on Aviv’s cost of capital is $500,000 that we are able to spend on delivering high quality health care services. Aviv put together the A Team and was relentless in presenting our credit worthiness to our banks.” said Stephen H. Neff, Aviv’s President and Chief Executive Officer.
Very few non-investment-grade health care providers have issued bonds in 2011 because of the lack of affordable credit enhancement options. In the first quarter of 2011, only $4.5 billion of long-term health care bonds were issued, compared to $10.4 billion in the first quarter of 2010, according to Thomson Reuters. And only $566 million of letter-of-credit-backed bonds were issued in the first quarter of 2011, compared to an average of $29.2 billion done annually from 2006 through 2010. Aviv’s bonds are supported by two $25 million bank letters of credit, one provided by M&T Bank and the other by Citizens Bank. The short-term ratings on the bonds are the highest available from Moody’s.
A swap on the majority of the variable-rate bonds is expected to fix the interest rate below 5 percent. This effective rate is more than 3.5 percentage points lower than what Aviv might have been able to achieve via unrated, unenhanced bonds, saving the community over $1.7 million in interest each year for a total of $8.5 million over just the first five years. Further, an unrated, fixed-rate transaction would have required compliance with more onerous financial covenants and borrowing a higher amount to fund a debt service reserve fund. Although most of its financial ratios are non-investment grade, Aviv will have limited annual liquidity covenants and no ongoing day’s cash on hand requirements.
“It’s a remarkably low cost of capital, especially for a senior living provider and especially in this credit environment,” said Tanya K. Hahn, Senior Vice President of Lancaster Pollard, the specialty investment bank that structured and underwrote the transaction. “The new corporate financing structure actually sets Aviv up to grow financially stronger as time passes. They’ll be setting aside cash every year and serving residents on a more efficient and modern campus with new service lines. The next time they need to fund a project, they should have an even more appealing credit profile than they do now, which means even better access to affordable capital down the road.”
Aviv’s new household design follows a new trend in care delivery that emphasizes the de-institutionalization of care with high staff-to-resident ratios, community spaces and a neighborly atmosphere. One floor of the Waldfogel Health Center will be dedicated to Alzheimer’s and memory care, while another will focus on sub-acute care. Residents will be able participate with or just enjoy the children at the early learning center on the first floor. The Jewish Historical Society’s offices will be housed in the new facility. Aviv will begin construction on the Waldfogel Health Center next week.