Are there major differences between the for-profit and not-for profit senior living models? “It depends…based on an objective analysis of each entity,” according to Jim Moore, President of Moore Diversified Services in Fort Worth, Texas. From an operational and market positioning standpoint, the two models have more similarities than differences. And the cost gap of debt financing is narrowing, too, depending on the quality of the asset.
For many situations, that narrowing cost gap has pretty much wiped out the advantage that tax-exempt organizations have always enjoyed. Whether through the banks, REITs, or government agencies, access to capital for taxable providers has been fairly stable over the last couple of years. In contrast, the tax-exempt sector has seen a fair amount of volatility and change over that same period of time.
Not only is the tax-exempt market down with regard to health-care debt issues, the tax-exempt issuers are employing different structures. Last year saw a fairly significant shift in the types of debt issuance, with fixed-rate being the most predominant structure. By comparison, in 2006 LOC-backed variable-rate demand bonds were predominant (see chart, p. 2).
Although today’s LOC market has clearly diminished from 2006-2007, as the larger players (both U.S. and European banks) dropped out of the senior living business, the general view is that LOCs (whether new or renewable) are still available, primarily from regional banks, according to Wyatt Ritchie, Managing Director at Cain Brothers in San Francisco, California.
Nevertheless, LOCs are not easy to secure, which may be why fixed-rate bonds were more prevalent in 2011 relative to five years ago. “Clearly, though, there are capital providers interested in LOC exposure,” he said, “but it’s not the old short list of go-to banks. We all need to be a little more creative about how we think about financing and refinancing transactions.”
“Like many markets, the tax-exempt market is driven by inflows and outflows,” Ritchie added, “During the movement toward quality in 2008 and 2009, the ‘muni’ market was perceived as a safe haven. When alarm bells went off relative to potential municipal bankruptcies, that movement quickly reversed and money flowed out of the tax-exempt market. Now that market is starting to see more inflows, which is driving availability into the tax-exempt sector and yields down.”
While lower interest rates are a good sign, the widening of credit spreads reflects a market in turmoil. Taxable issues are being done at very attractive rates. The slightly higher rates required for tax-exempt deals are due to the underlying concern relative to the “muni” market and the inherent risks to issuers. “Some people think the caution in the market is temporary; but there’s a changing dynamic, without question,” said Ritchie. “Our sense, though, is that the market will always be available to well-rated issuers—those rated AA, A, and even BBB.” They’ll continue to have access to capital at attractive rates.”
Spreads for lower or unrated credits have widened the most, as investors look for real returns on their risk. Senior living issues in the tax-exempt market, of course, are predominantly nonrated issues. And while it has been very difficult to complete nonrated issues, the current market is very specifically related to the issuers……..Want to read more? Click here for a free trial to Senior Living Business and download the current issue today