Not-for-profit senior living companies attracted to bank placements for capital should beware of the “yield maintenance” or “increased cost” provision that can be part of such agreements, according to Tad Melton, managing director of specialty investment bank Ziegler.
“This clause allows the lender wide latitude to unilaterally increase the underlying all-in interest rate by modifying the interest rate, tax-exempt ratio or credit spread of the agreement,” Melton wrote in the latest issue of the company’s “Senior Living Finance Z-News” newsletter. “Typically, yield maintenance language in bank placements does not specify what conditions would trigger the bank to raise the underlying placement all-in interest rate, but rather very broadly specifies the considerations allowing yield maintenance enactment for a wide variety of developments.”
Bank placements can be attractive to senior living borrowers, Melton said, because they offer capital at a lower cost than some other options, such as traditional publicly offered bonds, and are relatively easy to execute. Many borrowers already know about some of their associated risks, such as a lender’s ability to accelerate debt repayment, the renewal risk or contingent liability aspect contained in some agreements, and the general lack of public disclosure required on key covenants and default events, he added.
Melton said is not aware of any banks that have enacted yield maintenance/increased cost provisions in bank placements, and perhaps none will. He added, however: “One of the key lessons of the financial crisis is to understand and contemplate all the risks embedded in financing agreements. Ultimately, we believe it is critical for borrowers to contemplate how these risks fit in the overall capital structure and within the organization’s risk tolerance.”
