CHICAGO — After investors agreed to take a haircut in a restructuring last year, an upscale retirement facility in downtown Chicago is again asking bondholders for more breathing room.
The Clare at Water Tower — which borrowed $229 million to finance the facility in 2005 — failed to make installment payments due Sept. 1 to cure a shortage in its debt service reserve on its fixed-rate bonds, triggering a default under its loan agreements.
That default in turn resulted in a mandatory tender on its roughly $125 million of floating-rate bonds, according to notices posted this week by bond trustee Bank of New York Mellon Trust Co. Under terms of the credit agreement, the trustee was to make a draw on the credit facility Friday to cover the tender price.
The Clare at Water Tower wants a forbearance agreement from bondholders as it seeks more time to attract residents. Management says it won’t pay into its debt service fund during the negotiations.
The facility’s fate remains unclear, depending in part on the willingness of bondholders to wait for housing values to rise and sales to improve so seniors can sell their homes and afford the costly entrance fees.
The Clare reported in a bondholder notice that it had recently begun negotiations with the trustee, investors and related parties on a new restructuring.
“To preserve prudent levels of cash reserves while the negotiations continue, the corporation has informed the other parties that it will not be making debt service payments in respect of the bonds until the negotiations have resulted” in a restructuring agreement, a notice from The Clare read.
The notices do not report whether an actual debt-service payment to investors had been missed or how much remains in reserves. Semiannual payments on the original 2005 fixed-rate bonds were made in May and November.
In a statement, The Clare’s sponsor organization blamed the facility’s struggles on the state of the economy. Its decision to forgo its monthly payments to the trustee to cover debt service payments “is the first step in a process of working collaboratively with our lenders to identify a permanent solution for the structure of The Clare’s debt in the future,” said Judy Amiano, president of Franciscan Sisters of Chicago Service Corp.
The Clare in its notice said it also failed to reimburse the bank for an interest draw on its floating-rate securities or pay LOC fees due on Sept. 1, triggering a default under the LOC agreement.
The notice said the trustee and LOC provider have not yet moved to exercise their enforcement actions and that the facility is seeking a forbearance agreement with the parties.
The Clare acknowledges there is no guarantee the parties will strike a forbearance agreement, eventually agree on the terms of a debt restructuring, or that the letter-of-credit provider or trustee will take enforcement action either on their own or at the direction of bondholders.
“If the parties fail to successfully negotiate a forbearance agreement and debt restructuring agreement in the near term, the corporation may consider and pursue strategic alternatives,” the notice read.
Richard Lehmann, president of Income Securities Advisers, which publishes Distressed Debt Securities, described the default as the largest he’s seen this year.
“It looks like a cash-flow violation, which in almost all case leads to a default” on debt service payments, he said.
The trustee — in its Sept. 20 notice — said it has retained the law firm Greenberg Traurig LLP to represent it in the default.
The Clare issued $229 million of debt through the Illinois Finance Authority in 2005 with Ziegler Capital Markets Group serving as underwriter. The issue included $91.5 million of fixed-rate bonds in an A, B and C series, and $125 million of variable-rate tax-exempt bonds and $12.5 million of taxable variable-rate bonds.
Under a restructuring deal reached with investors last year, 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 would extend the expiration dates to 2014. An out-of-court exchange offer for the bonds would also occur after the expiration.
At the time, public restructuring documents read: “The consummation of the bond exchange and the resulting reduction in the borrower’s annual debt service requirements is expected to improve the borrower’s financial performance and condition and increase its ability to generate sufficient cash flow to pay debt service and meet its other obligations, thereby reducing the risk of a default and its uncertain consequences.”
Market participants called it a good sign that The Clare could avoid bankruptcy as its residential rates fell short of initial projections and failed to generate the revenues needed to cover debt service.
The residential complex has struggled due to cost overruns, construction delays, and faltering occupancy rates, and has drawn on reserves to cover the most recent debt service payments.
Cost overruns occurred as construction costs rose due to issues with the building’s foundation and other problems that were discovered as building proceeded.
The problems led to a delay in the project’s opening date in late 2008, which coincided with the collapse of the housing market. The recession sapped the interest of some potential residents and negatively affected others, who had pre-sale contracts but needed to sell their existing properties in order to move into the Clare.
The retirement community includes 248 independent living apartments, 39 assisted living apartments, 15 memory-support assisted living suites, and 32 nursing beds, together with common areas and parking. 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.”
Loyola University of Chicago, owner of the site, is leasing the space for 99 years to the Clare, a stand-alone credit sponsored by the Franciscan Communities Inc.
