COVID-19 pushes already struggling senior living facilities into default

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The hard-hit senior living retirement sector continues to suffer from higher-than-anticipated expenses due to the novel coronavirus, pushing some facilities struggling before the pandemic into default.

American Eagle Delaware Holding Co., a borrower with bonds that are now junk-rated, said that it had less than 30 days' cash on hand Monday.

Florida National Guard soldiers test a staff member for COVID-19 at a state veterans nursing facility in Pembroke Pines. They've also tested at nursing homes and assisted living facilities across Florida.

The company has 16 memory care, assisted and independent living facilities in Alabama, Colorado, Florida, Minnesota, Ohio, Tennessee, Texas, and Wisconsin. Seven facilities are in Florida, while the other states have one or two facilities each, according to the company's website.

American Eagle struggled with liquidity problems before the first case of COVID-19 was detected, but it said in an April 8 disclosure that the pandemic has worsened its financial difficulties.

The company defaulted on $219.4 million of bonds issued in 2018 through the Florida-based Capital Trust Agency. It's seeking a forbearance agreement to stop paying debt service for six months, while pursuing a potential bond restructuring, a material event notice said May 11.

Tallahassee NHHI LLC failed to make the June 1 interest payment on $33.23 million of unrated bonds issued by CTA in 2015 to finance a 151-unit assisted living and skilled nursing facility called Tallahassee Tapestry in Florida.

It, too, was struggling financially before the COVID-19 outbreak and received a going concern opinion from auditors, indicating potential difficulty continuing as a going concern, for the year ended Sept. 30, 2019.

Lower occupancy rates and pricing, Tallahassee NHHI's management said in the audit, led to the determination that estimated cash flow for fiscal 2020 would be insufficient to cover operating expenses and debt service requirements.

Many nursing homes and senior living facilities are grappling with a combination of higher costs to protect patients and the inability to generate incremental revenue through new admissions in a health crisis that disproportionately afflicts the elderly, Moody's Investors Service said May 15.

Since March, at least nine elder housing borrowers, including American Eagle, have drawn on debt service reserve funds, violated their bond covenants, or requested a discussion with bondholders to renegotiate the terms of their debt, said Moody's analyst Dan Seymour.

"Depending how the crisis unfolds, a sector that consists mainly of unrated borrowers that are risky even in ordinary times may not have seen the worst of it yet," Seymour said. "The first few months of the crisis exposed the weakest borrowers, but many more would be unable to withstand a prolonged period of elevated costs coinciding with an inability to generate new revenues."

As of May 24, there have been more than 60,000 confirmed cases of COVID-19 and almost 26,000 deaths reported by 12,500 nursing homes across the U.S., the Centers for Medicare & Medicaid Services said Monday.

The reporting requirement only applies to the 15,400 nursing homes certified to provide Medicaid and Medicare services, and not to assisted living facilities, which are not federally regulated, CMS said.

Across the country, 1.82 million people have tested positive for the virus and 106,198 have died as of Wednesday, according to the Johns Hopkins University coronavirus tracker.

In Florida, a haven for retirees, some 20.5% of the state's 21.5 million residents are 65 years and older, according to the 2019 population estimate by the U.S. Census Bureau.

There are 691 licensed nursing homes with 84,448 beds and 3,080 licensed assisted living facilities with 106,103 beds, according to the Florida Health Care Association.

Those nursing homes are about 85% occupied at any given time, the association said.

As of Monday, 1,236 people at long-term care facilities had died from COVID-19 in Florida, according to the Miami Herald.

American Eagle, which failed to submit an audit for 2019, said in a material event notice May 7 that it was approved for a federal Paycheck Protection Program loan, but not for how much.

"The loan proceeds are equivalent to 2.5 months of the collective payroll expenses [of American Eagle] and its subsidiaries," the notice said.

Scott Kellman, American Eagle's former chief executive officer who said he remains involved with the company, declined to comment on its fiscal problems Tuesday. He told The Bond Buyer that all information will be posted on Municipal Securities Rulemaking Board’s EMMA filing system.

A look at the company's disclosures on EMMA paints a troubling picture beginning less than a year after the Capital Trust Agency issued its bonds in December 2018. Proceeds were used to purchase a portfolio of senior living facilities in eight states from Brookdale Senior Living Inc.

After the bonds priced, S&P Global Ratings assigned BBB ratings to $143.12 million 2018A-1 senior bonds and $20.5 million 2018A-2 senior bonds, and a BBB-minus rating to $33.96 million of 2018B subordinate second-tier bonds. S&P didn't rate a fourth tranche of $21.8 million 2018C third-tier bonds.

On Aug. 29, 2019, S&P placed the debt on CreditWatch with negative implications because the borrower had less than 30 days' cash on hand, and had drawn on reserves to meet operating expenses since June 2019.

On Sept. 25, 2019, S&P said deteriorating cash flow due to weaker revenues and higher-than-expected expenses led it to cut the senior-lien ratings to BBB-minus from BBB and the subordinate ratings to BB from BBB-minus.

On April 6, 2020, S&P said the senior and subordinate ratings were cut to CCC due to liquidity troubles, insufficient debt service coverage, and the lack of a debt service reserve fund for the senior bonds.

"In our opinion, potentially severe and ongoing impacts associated with the COVID-19 pandemic exacerbate" liquidity and debt service problems, said S&P analyst Aulii Limtiaco, adding that the lower ratings reflect the uncertainty that debt service payments will be paid on time.

Less than two months later on May 12, S&P lowered its ratings two notches to CC from CCC after American Eagle's disclosure that it "failed to make its monthly loan payments on April 15."

In a disclosure on COVID-19 on April 7, American Eagle said that its operational expenses had increased due to the pandemic. Along with additional staffing hours to conduct "greatly enhanced infection control," its costs for equipment and supplies also increased.

On May 11, UMB Bank NA, the trustee, notified bondholders of a default and said the company requested to delay making debt service payments to discuss a potential restructuring of the bonds.

In April, American Eagle said in an unaudited financial statement that it had 1,292 units occupied, for an occupancy rate of 88%. Revenue for the month was $4.34 million, down $284,874 or 6.2% primarily due to lower-than-anticipated move-in fees, lower occupancy and lower interest income.

Although Tallahassee NHHI defaulted on its June interest payment, it also received a potential lifeline from the Paycheck Protection Program.

In a May 7 disclosure, the company said it received confirmation that its full PPP loan request for $781,500 was approved.

The company said in a notice Monday that it has paid gross revenues from the operations of Tallahassee Tapestry to the trustee, as required by the indenture, but the revenues have been insufficient to cover operating expenses while dealing with increased costs related to COVID-19.

A majority of bondholders determined that the interest payment should be deferred so that the debt service reserve fund will remain intact for potential future needs, the notice said.

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Bond defaults Skilled nursing facilities Coronavirus Florida Covenants Unrated bonds Not-for-profit healthcare
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