Michigan nursing home operator plans bond sale after downgrade

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Michigan-based United Methodist Retirement Communities is pricing $18 million of bonds later this month that are likely to be well received despite a recent downgrade and struggles within the nursing home sector, said Lisa Washburn, a managing director with Municipal Market Analytics.

Washburn said that the market has been favorable for risky sectors and high yield credits.

“Supply-demand imbalance made worse by the loss of advance refundings and incremental demand from the individuals, particularly in TCJA/SALT-impacted states, has facilitated deals getting done down the credit spectrum,” she said. “I suspect that there will be robust appetite for an investment grade retirement deal, notwithstanding the recent downgrade.”

Washburn was referring to the Tax Cut and Jobs Act, which limited the federal tax deductibility of state and local taxes.

UMRC plans to use roughly $4.5 million of proceeds from the sale to refund debt it issued in 2013 and $8 million to refinance part of a construction loan the not-for-profit took out to complete capital projects. The remaining $5 million will be used for construction costs. The bonds are being issued via the Michigan Strategic Fund and are expected to price on June 11.

"The bonds will refinance $4.5 million of fixed debt at a lower rate and the $8.3 million is a conversion of variable rate debt to fixed debt," UMRC CEO Steve Fetyko said. "In both those cases we anticipate the rates on the new issue will be below rates we are currently paying. We have estimated this at $40,000 per year."

Ziegler is the senior manager. Miller, Canfield, Paddock and Stone is bond counsel.

The sale follows a one notch downgrade by Fitch Ratings to BBB on the back of significant capital spending but the rating agency said that once projects come online it will add positive cash flow to UMRC.

“The reality is for this particular credit is that yes they took a hit to some of their occupancy rates and operating ratios and their operating margins have been a little bit lighter than what they have been historically, but the fact of the matter is that they have undergone and continue to undergo a pretty significant capital spending effort on the campus which can be a bit of disruption to your day-to-day operations,” said Mark Pascaris, a Fitch analyst.

Pascaris said that despite the downgrade UMRC is in better shape relative to the performance of other competitors in the space primarily because it benefits from a strong housing market in its area of operation.

“We look at the downgrade as they are taking on more debt and using more of their cash than we had anticipated two years ago and fundamentally that is going to have to factor into our long term rating,” he said.

UMRC operates two facilities: Chelsea Retirement Community, a continuing care retirement community, and Cedars of Dexter, an independent living retirement community. In total, UMRC includes 236 independent living units, 152 assisted living units and 85 skilled nursing facilities.

It recorded more than $35 million in audited operating revenue in fiscal 2018 and, once the 2019 bond sale is completed, $45 million in outstanding debt.

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Ratings Primary bond market Not-for-profit healthcare Michigan Strategic Fund Michigan