CHICAGO — A nursing home in Gary, Ind., has skipped monthly payments that fund debt service since last March, forcing the bond trustee to dip into a reserve account to cover a Sept. 1 interest payment.

The trustee, the Bank of Oklahoma, has sent two default notices to the South Shore Health and Rehabilitation Clinic, a 129-bed long-term care center.

A July notice warns that without immediate payment, the trustee will call the bonds. A Sept. 9 default notice says that the borrower has continued to miss its monthly payments and that the trustee made the Sept. 1 interest payment of $177,212 from a debt-service reserve fund.

A $50,000 principal payment was also due Sept. 1, according to bond documents.

The letter also notes that the borrower is in default of a bond covenant that pledges the facility will maintain 45 days’ cash on hand each quarter, a debt-service coverage ratio of 120%, and no more than 10% of payables outstanding for more than 170 days.

The nursing home’s problems come after two years of struggles for many continuing-care retirement communities. Many such facilities continue to rely on investments as a chief revenue source, and have taken a hit in the turbulent post-2008 market.

The senior-living sector is also vulnerable to housing market fluctuations because it depends on the ability of seniors to sell their homes and move into the facilities.

Some credit analysts have suggested the sector has stabilized recently, as evidenced by the renewed ability of investment-grade CCRCs to enter the debt markets. Like much of the sector, however, South Shore Health is unrated, and the 2008 bonds would likely have been rated below investment grade.

The city of Gary acted as conduit issuer for the facility in 2008 to float $5.1 million of unrated first mortgage revenue bonds.

The debt was issued in two series, a $4.6 million tax-exempt series and a $500,000 taxable piece.

Macon, Ga.-based Sell & Melton LLP was bond counsel. Bergen Capital was the underwriter.

The facility began missing payments less than two years after debt-service payments started in March 2009. The bonds mature in 2038.

The debt does not carry any credit support from Gary and is payable only from project revenues.

The bonds are secured by a first mortgage lien on the facility and a security interest in the borrower’s personal property and to the borrower’s revenues generated by the facility.

A recent balance sheet dated July 31 reports that the facility’s assets — including the reserve fund — totals $5.46 million and its liabilities total $7.28 million.

Bond documents feature repeated warnings that investors will take “significant” risks by purchasing the debt.

With no assets outside of the project for security, bondholders’ payments will depend entirely on the success of the project, the documents note.

“The bonds should be purchased only as a long-term investment, as there can be no assurance that investors will be able to liquidate their investment,” the documents warn.

Occupancy rates at the facility were forecast to be 75% through 2013. Almost all of the residents were on Medicaid, with nearly all of the remaining on Medicare. Current occupancy rates are uncertain as facility representatives did not return calls.

The original bond issuance included $488,000 to fund the debt-service reserve account.

The borrower agreed that if the reserve account is decreased for any reason, it would make 12 equal monthly deposits into the fund.

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