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Unrated $690 million deal funds acquisition of senior health facilities

One of the largest municipal bond issues for senior healthcare facilities will come to market this month amid growing regulatory and financial challenges for the sector.

BB&T Capital Markets is sole underwriter for $689.7 million of unrated taxable and tax-exempt bonds that will finance the purchase or refinancing of 28 skilled nursing facilities in Texas and Oklahoma by a nonprofit known as Preservation Freehold Corp.

Baybrooke Village Care and Rehab Center in McKinney, Texas, is among the 28 facilities in the bond-financed deal.

WR Investments, a for-profit Texas limited partnership, owns all but two of the skilled nursing facilities that will be sold for $557.7 million.

The borrower is known as Sanctuary LTC, with Freehold as its sole member. The bonds will price through negotiation the last week of February via the conduit New Hope Cultural Facilities Corp., said Stephen Coma, managing director for BB&T.

“The facilities have been financed privately up to this point,” Coma said. “Essentially, they are selling assets from a for-profit owner to a nonprofit entity.”

StoneGate Senior Living, based in Lewisville, Texas, will remain manager of the facilities after years of experience in a difficult market.

“The general consensus is that the trend is increasing demand with increasing regulatory pressure,” Coma said. “They’ve done it in two states that have not been particularly generous with Medicaid.”

Before the bonds could come to market, bond counsel Abe Benavides of McCall, Parkhurst & Horton, consulted with county commissioners where the facilities were located.

The bonds carry no ratings, which is not unusual for the sector. Coma said BB&T’s roadshow has pitched to institutional investors with an appetite for higher yield.

“For transactions of this specific type it is more common for them to be unrated,” he said. “The type of facility sold does not fit easily into the ratings category. It’s a slightly different animal.”

The deal is sizable for an unrated senior healthcare bond transaction, but Coma could not say if it sets any records.

“I certainly wouldn’t make that claim,” he said. “For an unrated transaction, it’s a large issue. We like the fact that it’s 28 separate assets. We think that helps the credit.”

Skilled nursing facilities, designed to treat any patient with long-term needs, are generally identified with geriatrics, a field that is expected to boom with the aging Baby Boom generation.

BB&T has carved a sizable niche in senior healthcare during historically challenging times. Since 2003, the firm’s bankers have led more than 345 transactions exceeding $12 billion in par for senior communities, independent living, skilled nursing and assisted living organizations. They have worked with for-profit and nonprofit institutions, providing traditional bank loans along with municipal bonds.

The combined facilities will offer 3,482 licensed beds consisting of 2,944 for skilled nursing and 538 for assisted living. Of those 3,164 are operational, according to the offering document.

The deal comes less than three months after Senior Care Centers, Texas’ largest nursing home operator, reorganized after a year in bankruptcy court.

"As the entire industry has seen, the leases associated with the communities have become cost-prohibitive," Michael Beal, the chief operating officer, said when the Chapter 11 petition was filed in December 2018. "This kind of action is absolutely necessary to address those costly leases while continuing to care for our patients and residents."

The Chapter 11 filing came after SCC defaulted on rent payments to two of its landlords, Sabra Health Care and LTC Properties.

Long-term care facilities are facing more upheaval in federal reimbursement plans under recent regulatory actions from the U.S. federal Centers for Medicare and Medicaid Services (CMS).

“The proposals illustrate the Trump administration's efforts to make notable changes to Medicaid, even without legislative approval given the divided control of Congress,” Fitch analyst Eric Kim noted.

Medicaid expenditures account for about 20% of states' non-federal funds spending, according to the National Association of State Budget Officers. Medicaid covers nearly one in five Americans.

CMS recently issued two regulatory notices opening the door to potentially significant changes to Medicaid, Kim said.

The Healthy Adult Opportunity initiative (HAO) allows states to transition to block grants or per capita cap grants for certain beneficiaries, effective immediately.

“The Medicaid Fiscal Accountability Regulation (MFAR), which is in the midst of the rulemaking process and at least several months from implementation, could upend how states finance their Medicaid costs,” Kim said.

“Capping federal Medicaid contributions, even for a subset of beneficiaries, poses risks to state budgets and those entities reliant on state funding, including local governments and providers,” Kim said. “States would need to find revenue or cost savings, either in Medicaid or elsewhere, to offset reduced federal contributions.”

Fitch said it considers CMS's proposed MFAR as potentially more disruptive than HAO to credit quality. MFAR affects how states finance their share of the Medicaid program. Various state organizations including the National Governors Association and the National Association of Medicaid Directors have suggested MFAR represents a material change to current CMS policy, creating uncertainty for states and providers.

The American Hospital Association, in an analysis conducted with Mannatt Health, estimated MFAR could reduce total Medicaid spending nationally by $37 billion and $44 billion annually, or 5.8% to 7.6%, and by $23 billion to $30 billion for hospitals alone.

While states could adjust for the shifting priorities, “credit quality for those providers reliant on state funding could be more at risk, as they have relatively less fiscal flexibility,” Kim said. “This is particularly true for not-for-profit healthcare providers that have higher Medicaid exposure.”

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