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By: Erik Kelly, President
It is evident that issuers and borrowers across the public finance sector – from States and State agencies to municipalities, from higher education to healthcare and other non-profit organizations – are working diligently to establish new budgets for the upcoming fiscal year. Much uncertainty exists, of course, as a result of the economic slowdown being caused by the COVID-19 pandemic. Yet as much as one could linger in the abyss of uncertainty, it is imperative that organizations plan for the possible financial downside scenarios, ones that we hope don’t happen. Which brings to mind two particular phrases that I’ve heard from separate higher education clients of ours that ring truer now than ever: “We must hope for the best and plan for the worst,” and, along similar thinking, “Hope is not a strategy.”
As a result, many institutions are gathering information and data around all the potential “tools in the toolbox” that may be available to them to preserve liquidity, including budgeting cost reduction, organizational restructurings, and accelerating other operational strategic initiatives. Among the strategies that we believe should be known and evaluated are a number of forms of debt refinancing and restructuring. Even if such evaluations are undertaken on a preliminary basis, we think it is important to understand the cost / benefit analysis of debt restructuring and the methods to achieve the most favorable economic result.
For instance, the most common form of near-term cashflow savings relief is the restructuring of principal amortization either through a refinancing transaction or negotiation of the amortization schedule of a private placement. Depending on the call feature and/or put date of the debt, the resulting cost of restructuring may be manageable, as we recently have encountered a bit surprisingly. Tendering for outstanding bonds rather than defeasing them to the call date is an old concept that could be a possibility to make a restructuring even more affordable, but this approach also comes with its own challenges. If a longer call date or make-whole structure is associated with the debt, the restructuring may be significantly more expensive. Of course, any restructuring is dependent on a well-established and functioning marketplace, either in the capital markets or credit markets, which in and of itself will need to be closely monitored going forward.
The traditional debt restructuring approach is not the only alternative available, however. Debt service restructuring can be accomplished through the use of derivative instruments, specifically for those institutions that are contemplating or have executed synthetic fixed rate financings. Sam Gruer, a Managing Director at Blue Rose, recently published an article about this viable alternative, which can be found here. If upon reading about this strategy you would like to receive Blue Rose’s “Basis Points” newsletter, a publication that focuses on derivative and reinvestment strategies, please contact me or you can e-mail newsletters@blueroseadvisors.com.
Additionally, for projects that have been structured on a project finance basis, including public-private partnerships and stand-alone credit financings, the current COVID-19 pandemic may be creating even more significant cashflow concerns. If the need for restructuring or even forbearance is necessary, Blue Rose has developed strategies to assist institutions with these types of projects as well. Justin Krieg, Vice President at Blue Rose and part of the DeveloP3rs team, has recently summarized a white paper on the process for going about a forbearance strategy. The article, which can be found here, appears in our publication of “As It Happens,” which focuses on strategies related to P3 projects and financings. If you would like to receive the DeveloP3rs newsletter, please contact me or you can e-mail newsletters@blueroseadvisors.com.
If you have any questions or would like to discuss any of these strategies further, we encourage you to reach out to us. Our advisory team continues to strategize and diligently serve organizations across the country, safely from our home offices. We look forward to speaking with you soon.
About the Author Erik Kelly President | ekelly@blueroseadvisors.com Erik Kelly serves as President of Blue Rose, providing leadership, coordination, and oversight of the firm’s advisory services since 2011. He also serves as the lead advisor to many of the firm’s clients, including advising higher education entities on the planning for and execution of all types of debt and debt-related derivative transactions. In managing the firm’s various advisory service areas, Mr. Kelly oversees both compliance with the changing regulatory environment and the delivery of professional advice to the firm’s clients.Mr. Kelly holds a bachelor’s degree in economics from Amherst College and a master’s degree in theological studies from Bethel University. Mr. Kelly is a Series 50 qualified municipal advisor representative and Series 54 qualified municipal advisor principal.