Bankers Expect A Generally Healthy Lending Environment in 2010
A significant amount of the senior living lending that occurred in the not-for-profit sector in 2006-07 did not involve banks. Rather, it involved tax-exempt bonds, fixed-rate bond markets, auction-rate securities, swaps and so forth. The evaporation of those non-bank alternatives in 2008-09 significantly impacted the industry’s access to capital and, as a result, the demand for bank capital went way up.
With a few notable exceptions, the senior living industry remained relatively healthy throughout the recent recessionary period, although limited access to the capital markets put most projects on hold. Institutions with insurance-based letters of credit (LOCs) were hit particularly hard until they could be wrapped or restructured. And institutions with brand-new projects ready to go suffered above all. Fortunately, all that has settled down, and the outlook is that the lending environment will continue to improve. The need for senior care hasn’t changed. Baby boomers haven’t stopped aging. And bankers still consider senior living a growth market.
Nevertheless, some banking organizations that, in the past, were highly visible in the not-for-profit senior living sector have pulled back from—or completely out of—senior living finance for various reasons. Fifth Third Bank, for example, is no longer active in senior housing lending because of “too much exposure to the sector,” according to Nathaniel E. (Ned) Sher, Vice President of National Healthcare.
And the national not-for-profit health-care group at Wells Fargo Bank, N.A. is supporting existing relationships but pursuing new senior deals on a very limited basis, according to John D. Bonifacio, Vice President & Relationship Manager. Instead, his group is “focusing on mid-size to larger acute-care systems.” Wells Fargo typically finances senior living on a decentralized basis through its various lending groups across the country, but Bonifacio suspects those groups are acting similarly.
Then, a little more than a year ago, Bank of Scotland—with more than 20 years of experience in the not-for-profit CCRC sector—was acquired by Lloyds Banking Group, which does not currently have a presence in that market. “We’re in the process of integrating the two organizations,” said Andrew P. Nesi, Senior Vice President – Senior Living. “And while I’m confident we will re-enter the market in the near future, we are focusing on servicing our current clients and formulating a strategy for future business.”
Open for business
Other banks are continuing or beefing up their lending to the senior living sector or jumping into the market. “We’re open for business,” stated Scott Dagenais, Senior Vice President of Government, Healthcare & Not-for-Profit Banking at M&T Bank. “We’re interested in all forms of lending to senior living providers, including LOC renewals, direct taxable loans, and bank-qualified tax-exempt debt.”
From a new business perspective, 2009 was a very active year for M&T Bank, according to Dagenais. But despite all the work spent on various deals, many never happened. “We issued proposals on construction financing for senior living facilities fairly consistently over the past two years,” he said, “but the number of deals that closed have been fairly few. People are just sitting on them.”
Dagenais suggested that the principal reason is that investors are looking at new credit metrics compared to two or three years ago and the new market dynamics. “Their own capital is more limited,” he said, “so if the deal isn’t a slam dunk, they’re not going to do it.”
Most business that did get done related to providing bank capital to support the bank’s existing customers, some of whom were trying to restructure out of various situations that had fallen apart around them. “The vast majority of our customers, however, survived the slowdown pretty well,” Dagenais said. “We just haven’t seen a lot of new projects.”
M&T has more senior living credit outstanding today than in 2007, but the rate of growth for credit issued in 2007 was much higher than the modest growth over the past year, according to Dagenais. “We’ve actually picked up some new banking relationships in the last couple of years,” he noted, “but those are situations where we see a good chance for a substantial long-term relationship.”
Before the financial crisis occurred, the deals banks were making were often transaction-based. Today, with the majority of the deals being made to support existing customers, one hopes that this should eventually result in a healthier banking atmosphere. “That sort of lending environment tends to ring the excesses out of the system,” said Dagenais. “A sound financial footing is good for everybody, and a more rational investment and lending climate is probably a very good thing.”
Mostly add-ons rather than new deals
Citizens Bank has retained its highest short-term ratings with Moody’s and Fitch; but when Standard & Poor’s downgraded the bank from A-1 to A-2 last year, it caused havoc with Citizen’s $5 billion book of LOCs (across all segments, including education, health care, human services, cultural, etc.).
At this point, Citizens is looking at “add-on” rather than new transactions, according to Bruce H. Figueroa, Division Executive, Healthcare and Non-Profit Division. “There just aren’t a whole lot of ground-up new developments,” he observed. “The organizations that were dependent on entrance fees are struggling, so development has slowed down. But if we see a strong sponsor with cash flow that can service some level of debt and an operating model that isn’t 100% dependent on the entrance fees, we’re interested.”
Citizens does have capital and is interested in putting it to use. In addition to construction loans for add-ons to existing communities, the bank is renewing LOCs—although, because of the downgrade, it has had to either restructure its LOCs with an FHLB wrap or convert them into direct purchases.
“The FHLB wrap is a good tool,” Figueroa acknowledged. “We post the collateral to get the wrap and then pass the cost along to the borrower, though, so the rates and terms are less competitive than they would be otherwise”
In reaction to the bond insurance problems of 2008 and the downgrades of 2009, banks seem to be shying away from counterparty LOC structures and prefer direct purchases. “The underwriting is essentially the same,” said Figueroa. “We’re certainly not exiting LOCs as they come up for renewal; but in this market, banks across the board can demand tighter terms, require additional covenants, and charge higher fees.”
Overall, Citizens’ lending slowed down in 2009. That’s a good thing, according to Figueroa, because the borrowers that remain have “sort of gotten over the hump.” Going forward, he expects lending in the sector to be less than 2007-08 levels, because he doesn’t see a lot of new deals in the pipeline. “We’re not seeing a lot queued up,” he said.
Looking to the future, the bank will continue to focus its lending to customers in its regional markets, which include the Midwest, New England, and the Mid-Atlantic regions. And it will focus on current business relationships rather than reaching out for new ones.
“We’re a relatively conservative bank,” said Figueroa, “and major banks that were aggressive in this arena in 2007 and even 2008 were able to make better deals than those that we put out in the market. Now, the aggressive banks have been forced to pull back. So with fewer banks willing or able to make better deals, we’re now better positioned to win the business.”
BB&T Capital Markets has always been involved in lending to not-for-profit senior living providers, and its overall appetite for lending to the sector—and its current availability of capital—remains “strong,” according to Sterling B. (Tad) Pierce III, Senior Vice President. BB&T is currently renewing LOCs, albeit with shorter terms and higher fees, as well as making direct taxable loans and bank-qualified tax-exempt loans for not-for-profit senior living projects.
“Senior living deals are starting to get off the sidelines,” Pierce observed. He expects BB&T to increase its volume of senior living lending in 2010, focusing primarily on regional borrowers and current business relationships—and on multi-facility systems whenever possible.
At Key Bank, meanwhile, the vast majority of its approximately $1.5 billion commitment to its seniors housing portfolio (not including exposure to the health care REITs) is targeted to the larger public or private for-profit operators. “We expect to do more seniors housing lending in 2010,” said Angela Mago, Senior Vice President and National Manager of the bank’s Real Estate Capital-Healthcare Group. “Our focus will be on providing financing for acquisitions, debt refinances and recapitalization events.”
Key Bank’s capital is often used as a bridge or an interim solution to a permanent placement of debt or to a capital markets event, according to Mago. The bank is also a provider of permanent mortgage financing through Fannie Mae, Freddie Mac and HUD.
“Our seniors housing portfolio has performed well compared to other real estate asset classes,” she continued. “The entrance-fee CCRCs have seen the greatest pressure due to the impact of the decline in the housing markets and the impact of the economy on the consumer; however, the level of pressure is very project-specific and market-specific.”
Key Bank’s lending standards continue to be “prudent,” she noted. “The strength of the sponsor (i.e., liquidity, cash flow, leverage, willingness to support their projects) is a key consideration in any credit request.”
No pullback in capital here
Throughout 2009, TD Bank never had a pullback in capital for its health-care group—an overall $5.5 billion aggregate health care portfolio. “We maintained the same budgets and the same access to capital,” said Colleen Mullaney, Senior Vice President. “We have no TARP money, we had no subprime debt, and we’re one of only two AAA-rated banks left in the country.”
TD’s approach to the credit crisis and economic downturn was very “granular,” she explained. “Our health care people booked assets last year, but since our lending to hospitals, skilled nursing facilities, assisted living and senior housing communities is done regionally, each marketplace is evaluated individually.” Yet, TD did pull back slightly from the LOC market for four or five months to determine how much to invest in the area. However, the health care portfolio is one of the strongest for the bank “…and always has been,” Mullaney said.
“Our interest in lending to the not-for-profit senior living sector remains very strong,” she noted, “but it’s not exactly the same as it was two years ago. We’re not banking stand-alone independent living, for example. And a newer CCRC with five times more independent living than it can fill—and being carried by its health center—that doesn’t make sense. But if it’s a community that has survived the economy (which a lot of rental models have) and isn’t a drain on its health center, then why not bank it?”
Going forward, TD Bank is interested in making selective construction loans—the right customer financial profile and the right structure—and has a substantial amount of money currently allocated to health care LOCs. “We’re absolutely interested in bank-qualified deals, because that’s direct debt to the bank and about the same risk as an LOC,” Mullaney added. “Mortgage finance has always been good, too. And we’re doing bridge loans with the intent that the customer will go to HUD. That allows them to grow and reduce their exposure with the bank, and we continue to be their financial partner.”
Have credit standards gotten tougher? Or are bankers simply reacting to the new economic realities? Loan structures and terms certainly are tightening, but Mullaney prefers to characterize them as “realistic” and coming into line with where they should have been all along—resulting in a much healthier banking environment. Covenants being written now are, again, more “realistic” and more appropriate to the transaction. But TD is not charging higher fees. “Absolutely not a penny more,” she said, “and there’s no mandate for that to change.”
New and renewed interests
Comerica Bank never had a “strong push” into the not-for-profit senior living sector but has been involved with “bits and pieces that made sense,” according to Artil Leo II, Vice President, Healthcare and Education. “In 2007, the bank did a deal for about $25 million,” he said. “In 2009, there were effectively none. But we’re starting to look at LOCs and direct taxable loans for construction financing as new opportunities, as the demand appears pretty consistent.”
Still, Comerica is focusing its lending regionally and primarily on current business relationships. Fees, margin spreads, and rate spreads have gone up. Cash thresholds in covenants are higher. And LOC terms are no longer than three years at this point. “Most of that is in response to debt service coverage falling off a bit,” Leo explained. “It’s a tradeoff. If we’re not seeing the performance, we need to see the cash on the balance sheet.”
Then, Union Bank of California, which hasn’t been involved in lending to the not-for-profit senior living sector, is currently undertaking “an initiative to get into that space,” according to Sean Conlon, Senior Vice President, Health Care Finance Division. “We’ve got a health care product and a real estate product,” he explained, “but we don’t have a health care real estate product. The last year has been rough on lenders, particularly those lending to the CCRC market, but our view is that now there’s only an upside. So while our initiative is only on paper at this point, we feel it’s an ideal time to be getting into this market.”
Union Bank plans to focus on LOCs that enhance tax-exempt variable-rate notes and on construction loans. “We would be lending the portion that is repaid with entrance fees,” Conlon clarified. “At this point, we’re looking only at entrance-fee CCRCs and not contemplating any lending to the more mainstream assisted living side.” He expects the deals to be structured so that the loans are paid off within three years. And whether the bank keeps a piece of the long-term financing is “stage two” of the plan.
Union Bank expects to work primarily through referrals from advisor investment banks and secondarily with “developers of good repute,” Conlon added. The western half of the United States will probably be the geographic focus, since that corresponds to the bank’s footprint. With branch offices in Chicago and Dallas, however, opportunities in much of the rest of the country are not necessarily excluded.
Defaults and workouts
Nearly all these bankers indicated that the number of customers in their current senior living portfolio that are experiencing technical or actual default levels is very low—from none to five or 10 percent—and only a handful, if any, are being served by a workout group. “It’s minimal,” stressed Figueroa. “Banks that were more aggressive with their lending a couple of years ago may be dealing with higher levels, and some entrance-fee model projects that came on line at the wrong time may be having problems. But it’s a pretty small number. If it were larger, you can be sure that our credit people [and those at other banks] would put on the brakes. At this point, nobody on the credit side has said that we shouldn’t consider a good opportunity.”
The not-for-profits appear to have fared better than the for-profits. “Generally speaking, organizations that weren’t pushing the envelope for returns were in a better position to weather the crisis,” Dagenais concluded.
Bankers Expect A Generally Healthy Lending Environment in 2010