CHICAGO — Holders of $229 million of debt issued for a now-bankrupt upscale continuing care retirement community in downtown Chicago stand to recoup at least 20 cents on the dollar following a competitive auction Thursday among three bidders vying to purchase the facility’s assets, according to a lawyer involved in the case.
Though investors still face a sharp loss, it’s significantly less of a haircut than initially expected based on the preferred bid — known as the stalking horse bid — negotiated last month by the operators of The Clare at Water Tower and Harrison, N.Y.-based Senior Care Development LLC.
Senior Care, which ultimately emerged as the winning bidder Thursday, initially offered $86 million to acquire the facility, including the assumption of debt and cash totalling $29.5 million. That figure included $2 million earmarked to cover deferred rental payments owed to the building’s owner — Loyola University of Chicago — and $12 million to repay debtor-in-possession financing, leaving only $15 million for bondholders.
Two other qualified bids were received by the April 10th deadline, leading to the auction Thursday. The high bid for $32 million in cash over the initial offer of $29.5 million from Senior Care came from the Tulsa-based organization Senior Star Living, which operates nine senior living facilities, with funding coming from Health Care REIT. The third bid for $31.05 came from Pearson Street Partners, sponsored by The Prime Group, sources said.
Senior Star eventually dropped out of the bidding Thursday, with competing offers between the remaining two driving the net cash portion of the offer up to a net of $53.5 million. “The bidding was vigorous and representatives of the variable-rate and fixed-rate bondholders were pleased with the results which exceeded expectations,” said one attorney who attended the auction.
The ultimate recovery rate is still not clear as a long list of debts must be settled and a bankruptcy court judge must approve the asset sale results. U.S. Bankruptcy Court Judge Susan Pierson Sonderby in the Northern District of Illinois in Chicago on April 24 is expected to consider the results and The Clare’s confirmation plan allowing it to exit bankruptcy.
An attorney involved in the case said the competitive auction raised the recovery rate to more than 20 cents on the dollar from less than 10 cents.
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.
Attorneys for The Clare announced at the hearing last month that they had reached agreement with Loyola, the owner of the 53-story building that houses the facility, on lease revisions that ease restrictions governing who can operate the facility and other terms.
The Clare also plans to restructure its 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. The Clare will shift to a model that reflects the industry standard, allowing for a refund when an individual’s unit is filled.
Almost out of cash to keep operating, the CCRC filed for Chapter 11 in November. Since it opened in December 2008, The Clare has struggled to fill its units. At the close of last year, only 34% of the units were occupied.
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 through the Illinois Finance Authority in 2005, with Ziegler Capital Markets Group as underwriter. The issue included $91.5 million of fixed-rate bonds in A, B and C series, $125 million of variable-rate tax-exempts, and $12.5 million of variable-rate taxable bonds.
Its sponsor organization, the Franciscan Sisters of Chicago Service Corp., has blamed 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.
Bank of America, which had provided a letter of credit on the floating rate bonds, now holds that debt, while the fixed-rate bonds are held by a handful of institutional investors. Bank of New York Mellon Trust Co. is the trustee.