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Major CCRC Developer in Chapter 11

OCT 21, 2009 7:25pm ET
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Erickson Retirement Communities, developer of 19 continuing-care retirement communities throughout the U.S., filed for Chapter 11 bankruptcy Monday in U.S. Bankruptcy Court in Dallas.

Approximately $510 million of tax-exempt and taxable municipal debt remains outstanding on various Erickson properties, according to spokesman Mel Tansill.

While the company is not the direct obligator of the debt, many of the borrowers rely on Erickson funds to help meet operating costs. Erickson is based in Maryland.

For example, Linden Ponds Inc. in Massachusetts is a nonprofit that leases its Erickson CCRC from Hingham Campus LLC and has hired Erickson to operate the facility. Hingham is owned by Erickson. Erickson also owns the general contractor that builds its facilities.

If it receives court approval, Redwood Capital Investments LLC, a private investment company owned by Baltimore businessman Jim Davis, will purchase Erickson. Court approval may occur in the first quarter of 2010, according to an Erickson press release.

“To complete the sale of the company to Redwood, Erickson must restructure its debt ... Given the nation’s severe economic crisis, Erickson had been in discussions with its lenders in recent months to restructure its debt but, despite good-faith negotiations with certain of its creditors, it was unable to reach an out-of-court agreement,” the press release said.

Not including the municipal bonds, Erickson has $1 billion of outstanding debt, according to Tansill.

Erickson plans to separate its management operations — which provides ¬services, care, and amenities for its residents — from its real estate development arm. The bankruptcy announcement follows default notices on municipal bonds and missed monthly payments to bond trustees.

In August, nonprofit Monarch Landing Inc., located 28 miles west of Chicago, had a default event on $178.7 million of fixed-rate Series 2007A and variable-rate Series 2007B bonds after it failed to make regularly scheduled principal and interest payments due July 1 and Aug. 1. Wells Fargo Bank NA is the successor trustee for the bonds. M&T Bank was the prior trustee.

Wells Fargo’s counsel is Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC. Monarch Landing is now seeking to restructure its debt and is in communications with its bondholders, according to the default notice. Healthcare Management Partners LLC and Herbert J. Sims & Co. are assisting Monarch, and other Erickson not-for-profits, with a possible debt restructuring.

Major bondholders of Monarch Landing municipal bonds include Oppenheimer Funds, Capital Research & Management, and Scudder Kemper Investments, among other investors, according to regulatory filings through June 30.

The Series 2007 official statement for Monarch Landing addressed the risks to investors.

“Payment of the Series 2007A bonds will depend on [Monarch’s] ability to generate revenues sufficient to pay debt service on the Series 2007 bonds while paying operating expenses of the facility,” according to the OS.

Monarch’s “ability to generate revenues and its overall financial condition may be adversely affected by a wide variety of unforeseen events and conditions, including the failure of [Monarch] to enter into sufficient residence and care agreements or maintain adequate occupancy levels, changes in demand for facilities similar to those provided by [Monarch], fluctuations in public confidence both in the facility and the services it will provide, changes in government licensing procedures, regulation, and competition, and changes in the rules and guidelines governing reimbursement for health care by third-party payors.”

The Illinois Finance Authority, as a conduit issuer, sold the $178.7 million of debt on behalf of Monarch Landing. Series 2007A bonds priced on Dec. 3, 2007, with yields ranging from 5% with a 5% coupon for bonds maturing in 2008 to 7% with a 7.05% coupon for bonds maturing in 2042. On Oct. 2 at 4:41 p.m., a customer purchased $35,000 of Series 2007A bonds maturing in 2027 with a 16.37% yield while another customer at 4:12 p.m. the same day sold $35,000 of debt maturing in 2027 with a 16.71% yield, according to the Municipal Securities Rulemaking Board’s Electronic Municipal Market Access system.

The IFA also sold $137.1 million of fixed-rate Series 2007A and variable-rate Series 2007B bonds on behalf of another Erickson nonprofit, Sedgebrook Inc. That CCRC is located 20 miles northwest of Chicago.

M&T Bank, as trustee, released a notice of potential events of default on Aug. 27 as Sedgebrook failed to pay principal and interest payments of $556,631 to the trustee on Aug. 15.

Sizable holders of Sedgebrook municipal debt include Oppenheimer Funds, Columbia Management Group, and Capital Research & Management, as well as other investors, according to regulatory filings through June 30.

The Series 2007A bonds priced on Aug. 9, 2007, with yields ranging from 5% with a 5% coupon for bonds maturing in 2008 to 6% with a 6% coupon for bonds maturing in 2042. On Sept. 18 at 4:58 p.m., a customer sold $40,000 of debt maturing in 2042, yielding 13.96%, while a minute before, a customer bought $40,000 of debt maturing in the same year, yielding 13.54%, according to EMMA.

In addition, Erickson indefinitely halted construction on its bond-funded Linden Ponds campus in Hingham, Mass., which is 50% complete. Development of the second half of the CCRC was to begin in November of last year and be completed next month. It is anticipated that the construction delay will also slow down the flow of entrance fees.

While Hingham Campus LLC, Erickson’s land-owner subsidiary for the project, has agreed to meet working capital needs if entrance deposits fall short, the subsidiary may not be able to help the not-for-profit with its debts.

“If initial entrance deposits are insufficient to fund working capital deficits and Linden Ponds is unable to secure adequate working capital in the future from Hingham, Erickson, or another source, Linden Ponds, with the assistance of its financial advisers, will have to pursue alternate strategies regarding its obligations, including (without limitation) use of reserve funds under the bond indenture,” according to the material event notice.

The Massachusetts Finance Development Agency sold $156 million of debt in 2007 on behalf of Linden Ponds to help finance the project, including fixed-rate Series 2007A bonds for $101.3 million, variable-rate Series 2007B bonds for $45 million, and taxable, variable-rate Series 2007C bonds for $10 million.

Major investors of Linden Ponds municipal debt included Eaton Vance, Merrill Lynch Asset Management, and Scudder Kemper, as well as other bond holders, according to regulatory filings through June 30. Eaton Vance last week said it no longer owns any Erickson-related bonds..

Series 2007A bonds priced on July 20, 2007, with yields ranging from 4.5% with a 4.5% coupon for bonds maturing in 2008 to 5.49% with a 5.75% coupon for bonds maturing in 2042. On Sept. 21, a customer at 12:49 p.m. bought $3 million of Series 2007A debt maturing in 2035 at a yield of 7.75% after a customer sold the same amount of debt nine minutes earlier for a yield of 7.777%, according to EMMA.

In the three bond deals mentioned above, the fixed-rate bonds do not carry credit ratings while the variable-rate series carry enhanced credit ratings from Standard & Poor’s ranging from AA-minus to AA-plus, based off of the letters of credit that enhance the floating-rate debt.

The national housing crisis has hit Erickson, which typically designs large-scale CCRCs of about 1,500 units. Senior citizens are finding it harder to sell their homes in the tight housing market and are delaying or choosing not to move into retirement communities. That curtailed the demand for CCRCs and weakened Erickson’s balance sheet.

For 2009, the company anticipates its communities will collect 1,261 initial entrance fees, or settlements, from prospective residents for new independent living units, according to a Ziegler Capital Markets report on Erickson dated March 3. That 1,261 estimate is down from 1,419 gross settlements in 2008. Settlements in 2007 and 2006 totaled 1,583 and 1,617, respectively.

Ziegler over the years has served as book-runner on more than $1 billion of tax-exempt municipal bonds that helped finance development of Erickson ¬properties.

In addition, Erickson’s complex organizational structure and flow of funds now have the company, its subsidiaries, and the nonprofits responsible for the municipal bonds looking to each other for money owed and money lent.

“Erickson’s corporate structure and its municipal bonds are probably the most complex situation that I’ve encountered in munis,” said Edward Merrigan, director of research at Ziegler. “You have the parent, then you have all the subsidiary landowners — for-profit landowners and building owners at the Erickson level — and all of those landowners have a corresponding not-for-profit.”

Erickson builds and develops CCRCs through its subsidiaries that own the land. Most Erickson communities have 1,400 to 2,000 units at full build-out among three or four “neighborhoods.” A not-for-profit organization leases the site from the land-owning Erickson subsidiary.

While the nonprofit pays lease payments to the land-owning subsidiary, it also collects reservation payments from prospective residents to hold units. Once the nonprofit receives reservations totaling 10% of the cost of a neighborhood’s development, the Erickson subsidiary takes out a bank loan to finance initial construction costs.

When units are complete and ready for occupancy, soon-to-be residents then pay settlements to the not-for-profit. That organization then loans the settlements to the Erickson subsidiary, which uses the funds to pay additional construction costs not met with the bank loan.

After meeting occupancy goals, the nonprofit and Erickson enter a purchase option agreement in which the nonprofit receives the sole right to purchase the CCRC. The nonprofit then sells tax-exempt municipal debt through a conduit issuer to generate the necessary funds to buy the development from Erickson. The company then pays down the outstanding bank loan held by its subsidiary with the bond proceeds.

“These were large multi-year campuses so the not-for-profit was able to get in early on the Erickson model and then when it got to this critical [occupancy] of the neighborhoods and got turnover entry fees, etc., and the development aspects were done over the course of seven or eight or 10 years, then the not-for-profit would buy it from Erickson,” Merrigan said.

“That’s when Erickson would book the majority of its development fee profit. And then the debt on the not-for-profit at that point in time would be self-sufficient because you would have turnover entry fees and others things and you’re not constantly in development and adding.”

Of the 11 Erickson CCRCs that are still under development and yet to be sold to the company, Monarch Landing, Sedgebrook, and Linden Ponds, along with Ann’s Choice in Warminster, Pa., have outstanding tax-exempt bonds associated with the developments. In 2005, the Bucks County, Pa., Industrial Development Authority sold $81.94 million of Series 2005A and Series 2005B bonds on behalf of Ann’s Choice.

Merrigan said Erickson’s large-scale CCRC model of 1,500 units, on average, and the complicated borrowing structure are unique to senior living developments.

“The way the municipal bonds were done were more complicated and complex then a typical single-site 300-unit CCRC,” Merrigan said. “The not-for-profit doesn’t own the land so therefore as a bondholder you have a lease-hold lien. So that was complicated, and you had recycling of entrance fees, they didn’t stay within the not-for-profit, they were being immediately loaned to the other entity. That was complicating.”

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