CHICAGO — The bankrupt Fairview Obligated Group, operator of several Chicago-area continuing care retirement communities, will hold an auction next month on its Rockford campus as investors who hold $57 million of mostly tax-exempt debt await word on how much they stand to recoup.
Fairview Ministries Inc. and its affiliate VibrantLiving Communities & Services filed for Chapter 11 last month in the U.S. Bankruptcy Court for the Northern District of Illinois.
The system operates Fairview Village and Fairview Baptist Home in the Chicago suburb of Downers Grove and Crimson Pointe in Rockford.
Fairview blamed its bankruptcy filing on strains caused by the recession and weakened credit environment that hurt access to capital, along with falling real estate values and investment losses.
A boost in staffing ahead of a planned expansion increased its costs at the same time it faced declining entrance fees, according to a report on Fairview authored by Keith Bernard, a senior credit analyst at B.C. Ziegler & Co.
Fairview has struggled to fill its independent living units as real estate sales and home values plummeted, leaving many seniors unable to sell their homes at a price to fund hefty CCRC entrance fees. The occupancy rate at its independent living units was 82%, according to its October, 2010 financials. It operates a total of 218 independent living units, 56 town homes, 132 assisted-living units, and 119 nursing care beds.
Home prices fell to a nine-year low last month and sales fell by 9.6% month over month, according to the National Association of Realtors. In the Chicago area, prices and sales reflect the national picture, but a new report said the number of pending contracts are up.
The recovery value for bondholders remains unclear, said Ziegler research director Edward Merrigan. Recovery rates in past CCRC cases have ranged from the single digits to 50 cents on the dollar.
A recovery estimate for Fairview is harder to gauge given the court’s approval this month of a $13.7 million debtor-in-possession financing.
The financing comes from a consortium of banks including Bank of America NA, which provided a letter of credit on a portion of the Fairview bonds, and Hinsdale Bank & Trust Co.
The financing allows the facilities to continue operating and carries a senior, secured super-priority lien on Fairview’s assets, giving it priority over bondholders.
Fairview said without the DIP it could not continue operating, which it argued would hurt all stakeholders, including residents and bondholders. It also can use the debtor-in-possession financing to honor entrance-fee refunds, which are considered crucial to remaining a viable continuing care retirement community business.
“It’s a new wrinkle in CCRC bankruptcy,” Merrigan said of the DIP approval. “On one hand, it enhances the value of the facilities by keeping the doors open, but repayment of the DIP financing now comes before bondholders, so it also hurts their position.”
Fairview has received a stalking-horse bid of $8.75 million for its Rockford facility. It will accept counter bids through April 8 and an auction — managed by B.C. Ziegler — is set for April 11 ahead of a May deadline to finalize a sale.
Fairview will then seek an affiliation agreement or attempt to sell its main Downers Grove campus ahead of a July deadline.
Fairview sold about $57 million of debt in 2008 through the Illinois Finance Authority to restructure $45 million of outstanding debt from a 2004 issue and to raise new funds for various projects. About $1.7 million went into a reserve fund. Fairview pushed off principal repayment and extended its maturity schedule with the sale that included a mix of fixed-rate and floating-rate bonds.
Fairview has not defaulted on debt service, but it has missed at least four consecutive monthly payments to the bond trustee that go into a debt service fund.
The fixed-rate bonds included a $19.7 million Series A. Another $3 million adjustable-rate series is reset in 2013 and a $2 million adjustable rate series will be reset this year. Those series were not rated.
The variable-rate piece of the deal included a $21.8 million series, a $4.5 million series, and a $6.3 million series. The last two series were initially issued as taxable bonds.
Bank of America NA provided a letter of credit for the variable-rate bonds with an expiration of 2013. The bank now holds the bonds, making it the majority bondholder.
Ziegler Capital Markets served as underwriter. Mesirow Financial Interim Management LLC is advising Fairview on its restructuring efforts. Wells Fargo Bank serves as bond trustee. While Ziegler is serving as investment banker and adviser on the Rockford sale, RBC Capital Markets has been selected to work on the sale of the Downer’s Grove facility and Jones Day is special counsel, according to bankruptcy documents.
The fixed-rate tranches paid interest rates of between 4% and 6.25%. In secondary trading recorded last summer, the price of some of the bonds had fallen to 20 cents on the dollar from 95 cents in 2009.
As of Feb. 8, the trustee held $1.7 million in various bond interest and reserve accounts attached to the A and B series. That amount was reduced to $1 million after the trustee used cash from the accounts to cover a Feb. 15 interest payment owed to bondholders. The bonds are secured by a lien on the mortgaged property, a gross revenue pledge, and reserve funds.
Merrigan said the CCRC sector remains a mixed bag.
“There are some — especially in good markets — that are thriving, and there are others that are having a hard time holding their own, especially with the housing crisis, and we’re not out of the woods yet with housing,” he said.
Some facilities, like Fairview, that face competition from newer continuing care retirement communities, have lowered entrance and monthly fees to lure more residents.
The Fairview facilities join a list of Chicago-area CCRCs that have struggled. Two suburban communities — Monarch Landing and Sedgebrook — were hurt by the bankruptcy of their parent’s Erickson Retirement Communities. Both CCRCs defaulted on more than $250 million of debt in 2009, and were sold for $40 million.
The upscale Clare at Water Tower in downtown Chicago restructured a portion of its debt in a $91.5 million issue last year as it struggled to meet occupancy projections.
Meanwhile, it appears there’s no shortage of buyers as the Illinois Finance Authority saw a surge in new CCRC financings and refundings in 2010, according to executive director Christopher Meister. CCRC issuance totals $458 million in its current fiscal year and represents 26% of overall issuance. Deals included a mostly new-money $200 million sale for the Admiral at the Lake in Chicago and a $117 million sale for the GreenFields of Geneva west of Chicago.
“It has been a remarkable year for CCRC issuance,” Meister said. “The long-term prospects are very good given the aging population, but their success is tied to housing values.” The newer facilities, now under construction, have some breathing room in hopes of a housing recovery.
