Chicago-based affordable housing bond portfolios default

Three Chicago-based affordable housing portfolios defaulted on June 1 debt service payments on $84.4 million of bonds, triggering another rating cut and more questions about the fate of the projects and bondholder prospects for recovery.

The bonds for the Shoreline, Icarus, and Ernst portfolios were sold between 2016 and 2018 through the Illinois Finance Authority on behalf of Ohio-based Better Housing Foundation to acquire and renovate the three complexes.

They have since changed leadership hands but efforts to solve poor conditions that have led to code violations, dwindling occupancy, and the loss of Chicago Housing Authority voucher payments have faltered and a cash infusion is needed.

“The portfolios are all in financial distress,” BHF wrote in a voluntary disclosure posted April 22 on the Municipal Securities Rulemaking Board’s EMMA website. “Because of the condition of the facilities, the financial performance of the portfolios has been strained. As a result, none of the portfolios will be able to make the debt service payments due on the bonds on June 1, 2019.”

Debt service reserves were tapped to cover the Dec. 1 payment and were insufficient to cover the June payment.

S&P Global Ratings cut the ratings to D from CCC-minus on Shoreline’s 2016 bonds, Icarus’ 2017 bonds, and Ernst’s 2018 bonds on Tuesday. “According to notices from the projects' trustees, the borrowers for the three portfolios, all affiliates of Better Housing Foundation, did not pay their scheduled June 1, 2019 debt service payments,” analyst Raymond Kim said in the brief report.

A majority of bondholders of each portfolio and two suburban BHF portfolios that are not in default voted to replace trustee Wilmington Trust NA with UMB Bank NA, according to recent disclosure filings. McDermott, Will and Emery represents the trustee.

When they were issued, the bonds carried ratings in the triple-B and single-A categories depending on their senior or subordinate status. All are now junk-rated, including the suburban Windy City and Blue Station suburban portfolios.

The $13.6 million of Shoreline bonds sold in 2016 have not recently traded. The default notice filed June 6 by Wilmington, still in process of being replaced as trustee, says the property owner “failed to make the required principal and interest payment on the Bonds on June 1, 2019 thereby triggering a non-payment Event of Default” under the indenture.

Previous loan agreement defaults were triggered and the ongoing and new default triggers remedies that allow for bondholders to demand immediate repayment of the bonds or foreclose on the property.

The $51.8 million of Icarus bonds sold in 2017 traded this week at 45 cents on the dollar. An April notice notified all bondholders of the change-over to UMB which filed the payment default notice.

The $19 million of Ernst bonds sold in 2018 traded last month at 42 cents on the dollar. A June 10 filing provided notice of the official hand-over of trustee responsibilities to UMB from Wilmington. A bondholder call is scheduled for Friday. UMB filed the June 6 debt service default notice.

The $25 million Blue Station bond portfolio that was sold in 2018 remains in good standing, and traded last month at 70 cents on the dollar before improving to 96 cents on the dollar in recent trades. A May filing provided notice of the change to UMB from Wilmington.

The $59.8 million of Windy City bonds sold in 2017 remain in good standing and traded recently at 82 to 83 cents on the dollar. A May filing notified bondholders of the impending change to UMB.

Problems had been brewing for some time as detailed in an August 2018 Chicago Tribune report that highlighted the poor condition of the foundation's buildings with little accomplished by the bond transactions other than generating millions of dollars in fees paid to people associated with the foundation and its real estate and debt transactions.

The city has cited nearly all of the individual Chicago properties in the portfolios for numerous code violations, bondholder notices report.

BHF representatives have not posted any new notices updating bondholders on their stabilization plans or if they’ve made progress in finding a source to fund several million in needed repairs.

One source familiar with the projects has suggested a restructuring implemented through an agreed-to Chapter 11 bankruptcy could provide one avenue forward.

The current board blames the portfolios’ woes on the previous boards and property managers. It also has sought to sell several of the portfolios.

Several lawsuits related to the projects are pending.

One of BHF’s former boards sued the property appraisal consultants seeking damages related to reports that BHF relied upon when purchasing the Shoreline portfolio. IAVF last year filed a lawsuit in federal court in Chicago suing Desak’s firms, accuses them of providing “deeply flawed due diligence prior to the purchase” and saying they then mismanaged the properties, according to a bondholders notice. The complaint seeks $10 million in damages. Desak denies wrongdoing and is seeking to dismiss the case.