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Bid on The Clare Offers Cents on the Dollar

MAR 16, 2012 6:53pm ET
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CHICAGO — Holders of $229 million of debt issued for a now-bankrupt upscale continuing care retirement community in downtown Chicago would recoup just pennies on the dollar under an initial bid for the facility.

A hearing is set for Tuesday before U.S. Bankruptcy Court Judge Susan Pierson Sonderby, in the Northern District of Illinois in Chicago, during which The Clare at Water Tower will ask the court to approve the bidding terms on an asset sale as part of its restructuring plan.

The Clare has negotiated terms with a preferred bidder — Harrison, N.Y.-based Senior Care Development LLC — under which the company would pay $86 million to acquire the facility. Senior Care, led by chief executive officer David Reis, is a distressed buyer of CCRCs that purchased two suburban facilities from bankrupt Erickson Retirement Communities.

“Based on the unique nature and sensitivity of the debtor’s business and the fact that its business is heavily regulated, it is vital that the debtor exit Chapter 11 as expeditiously as possible,” a court filing last week read.

The stalking horse bid includes the assumption of $57 million of debt for residential deposits and $29.5 million in cash, of which $2 million would go to cover deferred lease payments to the building’s owner, Loyola University of Chicago. Another $12 million would pay off debtor-in-possession financing provided by Redwood Capital Investments LLC, which allowed the facility to continue operating after its November bankruptcy filing.

That leaves $15 million to be distributed to bondholders. “It is a catastrophically bad recovery rate,” said an attorney following the case who asked not to be identified. “The hope is that the auction will bid the assets up… The Clare appears to be a very large and very public disaster.”

The Clare will accept additional bids until April 10 and, if it receives qualified bids that exceed the stalking-horse bid, an auction would be held on April 12 with the assets being sold to the highest and best offer. Houlihan Lokey Capital Inc. is advising The Clare.

Almost out of cash to keep operating, the CCRC filed for Chapter 11 in November after the failure of negotiations with a group of investors aimed at buying the facility some breathing room. The Clare has struggled with occupancy rates since it opened in December 2008 and just 34% of units were filled at the close of last year.

It defaulted on an installment payment due Sept. 1 to cure a shortage in its debt service fund on its fixed-rate bonds, triggering a default under its loan agreements. The CCRC also did not pay letter-of-credit fees or reimburse the bank for an interest draw on its floating-rate securities.

The Clare issued $229 million of debt via the Illinois Finance Authority in 2005 with Ziegler Capital Markets Group as underwriter. The issue included $91.5 million of fixed-rate bonds in an A, B and C series, $125 million of variable-rate tax-exempts, and $12.5 million of taxable variable-rate bonds.

The facility is located in a 53-story building on north Michigan Avenue in downtown Chicago. The Clare billed itself as a first-of-its-kind senior-living community when it entered the market, as it was located in a high-rise in the upscale Gold Coast neighborhood off Chicago’s “Magnificent Mile” owned by Loyola. The Clare includes 248 independent-living units, 39 assisted living apartments, 15 memory-support assisted living suites, and 32 nursing beds.

The Clare’s sponsor organization, the Franciscan Sisters of Chicago Service Corp., which developed the facility, issued a statement last year blaming the CCRC’s struggles on the 2008 housing crisis that drove down home values. It left seniors planning to move into the facility unable to sell their homes at a price needed to cover the expensive entrance fees.

The recession only added to The Clare’s woes, as did construction delays that arose due to issues with the building’s foundation and other problems that delayed the opening to late 2008, which coincided with the collapse of the housing market.

Bondholders took a haircut in 2010 under a restructuring plan aimed at giving the facility some additional time to succeed. The borrower issued $91.5 million of new bonds and held a tender and exchange, with some fixed-rate holders receiving 70% of their principal amount while others received 30%. The borrower reached a separate restructuring agreement with its letter-of-credit provider Bank of America NA on the floating-rate bonds that extended the expiration dates to 2014.

The break couldn’t fend off the default last September that triggered a mandatory tender on the floating-rate bonds. Bank of America now holds those bonds. The Bank of New York Mellon Trust Co. is the trustee.  Sources said the fixed-rate bonds are held by a handful of institutional investors who purchased them during their initial offering.

The Clare reported marketing its assets to 107 parties before entering into a purchase agreement with Chicago Senior Care, and continues to look for a better offer. A total of 52 signed confidentiality agreements to receive financial results and other information on The Clare. The deadline for interested parties to submit nonbinding expressions of interest was Dec. 15, 2011. Six were received and, after additional due diligence, The Clare operators reached an agreement with Chicago Senior Care on March 9. “The debtor believes the terms ... are in the best interests of its creditors and other constituencies,” the filings read.

The Clare’s attempts at a sale were complicated by several factors unique to its situation among CCRCs.

Most facilities own their properties. Under terms of its lease, Loyola can reject a transfer of the lease unless the purchaser is a nonprofit and affiliated with the Roman Catholic Church or another denomination whose doctrines respect its heritage. None of the bidders met both qualifications, so modifications were needed to the lease to achieve a sale.

Unlike other CCRCs, The Clare uses a deposit refund structure under which departing residents are refunded their entrance deposits when a sufficient number of new deposits to cover the liability are received. That posed “a significant obstacle to a sale” because it hurts the facility’s appeal, according to filings. The industry standard links an occupant’s refund to the re-occupancy of his or her vacant unit. The agreements are being modified, but a majority of residents and the court must approve.

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A recent phenomenon is the emergence of bonds with shorter call protection as funding alternatives for municipalities. However, the shorter call protection also dampens the potential upside for investors, which in turn reduces the price they are willing to pay.

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