CHICAGO — The federal bankruptcy court in Chicago has confirmed a reorganization plan for a suburban Chicago retirement community that advances plans for a proposed restructuring of its $116 million bond issue from 2006.
Judge Pamela S. Hollis of the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division, approved the plan submitted by the bond trustee and letter of credit bank for Clare Oaks at a hearing Nov. 15.
It paves the way for the Illinois Finance Authority's consideration of a roughly $90 million restructuring at its meeting Dec. 11, according to a notice posted Wednesday by the trustee Wells Fargo NA.
The IFA said it has received an application for the issue and is reviewing it.
The authority acted as conduit on the original issue of fixed- and floating-rate securities in 2006. Ziegler Capital Markets served as underwriter. The bonds financed the construction of the facility in the Chicago suburb of Bartlett and repayment of loans to its sponsoring organization the Sisters of St. Joseph of the Third Order of St. Francis Inc.
Sovereign Bank provided letters of credit on the floating-rate tranches in the 2006 issue and it now holds those securities.
Under the restructuring plan submitted to the court by the trustee and Sovereign, nearly $90 million of bonds would be issued in three series. The first for $12 million would be taxable and tax-exempt paper and it would be purchased by existing bondholders and Sovereign Bank. Proceeds would cover various debtor financing costs, the financing of capital expenditures, and fund various reserves and lease payments, and restructuring costs.
Two series of tax-exempt refunding bonds totaling $75 million - in a B series for $40 million and a C series for $35 million - would be sold with holders of the 2006 bonds exchanging their securities for those bonds.
The bonds will be secured by Clare Oaks' assets with the A bonds holding senior status over the B and C series, according to court filings. The objective is to lower annual debt service to an affordable level based on present and anticipated operations.
Alvarez & Marsal LLC is the restructuring adviser. Ziegler is also serving as an advisor. The trustee is represented by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC.
The retirement community is located on 41 acres with 136 independent units, 32 assisted living and specialty units, and 93 skilled nursing units. It opened in 2007 and has struggled - like many CCRCs across the country - due to the real estate market downturn that hurt seniors' ability to sell their homes and move into the facility.
Failing to fill its units quickly enough, Clare Oaks depleted its operating and debt service reserves, missed bond payments, and filed a voluntary bankruptcy petition in December 2011. It continued operations under debtor-in-possession financing.
The trustee and Sovereign first submitted the proposed plan of reorganization in August and asked the court to terminate Clare Oaks' exclusive right to file a reorganization plan under Chapter 11 of the bankruptcy code.
Clare Oaks' lawyers from Ungaretti & Harris LLP told the court soon after that it was not made aware that the bank and trustee had obtained necessary financing for a reorganization plan until a court hearing the day the trustee and Sovereign filed the plan.
Prior to the filing of the plan, Clare Oaks said it had engaged in extensive discussions with the secured creditors regarding a bond exchange through a plan of reorganization. "But there had never been any commitment for financing available to repay the debtor's debtor-in-possession financing or to otherwise make a bond-exchange feasible," attorneys for Clare Oaks reported in a court filing.
"Also, prior to that date the debtor understood that various key economic terms of such an exchange had not been accepted by the necessary bondholder interests." The situation forced Clare Oaks to pursue a sale of its assets.
Clare Oaks said in the filing that it welcomed the resolution of key economic issues and supported the bond exchange. A possible stalking horse bidder terminated its asset purchase agreement after the filing of the proposed reorganization plan by Sovereign and the trustee. The trustee notice reported that the IFA has made various recommendations on trading restrictions for the new bonds requiring that only qualified institutional buyers as defined by the Securities and Exchange Commission be allowed to purchase the bonds.
Clare Oaks is the latest in a series of CCRCs in the Chicago region to end up in bankruptcy.
A bankruptcy court judge in Chicago in April signed off on the $53.5 million purchase of the assets of The Clare at Water Tower. It provided a recovery rate of about 24 cents on the dollar for secured creditors, including most holders of $229 million of municipal bonds.
Two former Erickson Retirement Communities' CCRCs in suburban Chicago, Monarch Landing and Sedgebrook, were sold in 2010 in bankruptcy. Bondholders received roughly 20 cents on the dollar in those transactions.