Bankruptcy will bring final cut to holders of one Chicago housing portfolio

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Investors holding $13.6 million of defaulted Better Housing Foundation bonds sold for the Shoreline portfolio in Chicago would get a piece of the $3.9 million sale price proposed in bankruptcy documents.

BHF affiliate Lindran Properties LLC, which owns the Shoreline portfolio filed for Chapter 11 Jan. 31 in the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division, according to a notice posted by bond trustee UMB Bank NA on Tuesday.

The bankruptcy process allows for the sale of the assets free and clear of many debts, with bondholders in line to collect a portion of the sale proceeds after the housing court-appointed receiver is repaid for expenses and overdue taxes and some other debts are paid.

PRE Holdings 14 LLC is identified as the stalking horse bidder but other potential buyers could step forward during the bankruptcy process and potentially raise the price ahead of an auction.

How much of their investment bondholders will ultimately recoup remains a moving target. There’s little left in reserves and the final receiver and tax bills must be settled.

“The recovery is not great but it’s better than it could be” if the properties were allowed to languish unoccupied, as they are in need of repairs according to housing court records and an independent condition report, said one source. “Some funds will have to be carved out for the professionals” and other claims but “in the current circumstances the bankruptcy and sale is the best option.”

The bankruptcy documents note that no money will be available for unsecured claims. The case — 20-02834 — is before Judge Jack B. Schmetterer. “The trustee continues to monitor the situation closely and will make additional reports as circumstances arise,” read the UMB notice.

Shoreline is one of five portfolios that BHF sold $169 million of debt to purchase. The Illinois Finance Authority was the conduit issuer. The bonds sold between 2016 and 2018 for three Chicago affordable housing portfolios and two suburban portfolio. When they were issued the bonds were rated in the triple-B to single-A category by S&P Global Ratings depending on their senior or subordinate status. One series was not rated.

They are all now in default.

The fate of and potential recovery rates for the other portfolios remain uncertain, as some are in better shape than others and are occupied and generating revenue, while others are mostly vacant and in disrepair. All options remain on the table as bondholders seek to recoup their investments, said several sources.

The Shoreline bonds traded this week at 22 cents to 23 cents on the dollar, according to trade data on the Municipal Securities Rulemaking Board’s EMMA website.

A bankruptcy-led sale pursued by the borrower and owner represented the best of a series of bad options, trustee officials had told bondholders in filings and investors calls. The trustee could have pursued foreclosure as permitted under the bond indenture but that’s a timely process and could result in a weaker recovery given the poor condition of the properties and mounting liens from the housing court receiver and overdue taxes.

At any time during the foreclosure proceedings, BHF also could have stepped in and filed bankruptcy, usurping the trustee’s efforts. The trustee could not force a bankruptcy and sale or bond restructuring because BHF is a not-for-profit. Bondholders could seek to block the sale, but the trustee has authority to act in the absence of direction from a majority of holders to protect the assets under its fiduciary duties.

While the bankruptcy proceeds, UMB, which took over as trustee from Wilmington Trust NA, continues to sort out the mess and look for potential fixes for the other four portfolios.

First-time payment defaults occurred in December on $60 million of bonds sold for the Windy City suburban portfolio and $25 million for the Blue Station suburban portfolio. Defaults occurred in June on $84.4 million of debt sold for three Chicago-based portfolios: $13.6 million for Shoreline, $19 million for Ernst, and $51.8 million for Icarus.

In other recent BHF developments, UMB posted default notices last month that also provided notices of acceleration of loan amounts. The acceleration is allowed because of the ongoing indenture, mortgage and payment defaults for the Shoreline, Ernst, and Icarus portfolios.

“The trustee hereby declares the entire unpaid principal balance of the loan agreement, plus accrued interest thereon, as well as all amounts payable pursuant to the note, to be immediately due and payable,” one notice reads.

Condition reports completed on several of the portfolios also were published. Bond underwriter Stifel Financial Corp. commissioned and paid for the condition reports.

The Chicago-based Ernst bonds traded last month at 27 cents on the dollar while the Chicago-based Icarus traded late last year at 30 cents on the dollar. The suburban Blue Station and Windy City portfolios, which have higher occupancy levels, are trading at 50 cents on the dollar.

The Windy City payment default was triggered by the trustee’s decision to withhold payments due to covenant defaults that allow for the withholding of debt service payments.

The borrower violated provisions the loan agreement requiring adequate rental collections to meet debt coverage requirements the failure to pay property taxes.

On December 2, holders of a majority in outstanding principal amount on the Blue Station bonds told the trustee to withhold the December interest payment.

BHF president Andrew Belew said the foundation continues to make the payments needed to cover debt service and it wasn't a shortage of funds that drove the defaults.

“We made all payments to the trustees,” Belew said last month. “Bondholders made an election to suspend” debt service payments. "That was their choice. I have no opinion on what the bondholders do with their money.”

Belew said the suburban portfolios continue to operate and generate revenue and are at occupancy levels in the high 80% percentile and should be “just fine.”

About $600,000 was transferred from the suburban portfolios to the Chicago portfolios of Icarus and Shoreline, the trustee — represented by McDermott Will & Emery — told bondholders on a recent call. Such a transfer would violate the bond indenture. Belew declined to comment in an interview last month.

The Chicago-based portfolios stumbled out of the gate with reports of code violations, dwindling occupancy, and the loss of Chicago Housing Authority voucher payments.

The brewing problems were detailed in an August 2018 Chicago Tribune report that highlighted the poor condition of the foundation's buildings and reported that that little was 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.

Amid turnover in BHF leadership, efforts to deal with those problems faltered, and BHF lacked the funds for repairs.

Court-appointed receivers now control the Chicago housing stock and could eventually petition the court to foreclose on the properties in the Icarus and Ernst portfolios to recoup their expenses, which hold senior lien status. The housing stock’s delinquent property tax payments could also eventually move to take title. Occupancy is at best 15%.

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Bankruptcy Affordable housing bonds Illinois Finance Authority Speculative grade bonds Bond defaults