Bonds for Chicago affordable housing portfolio near default
Holders of $84.4 million of housing bonds sold to acquire three affordable housing portfolios in Chicago are bracing for a June default.
Efforts to solve the problem are complicated by city code violations, dwindling occupancy, and the need for a cash infusion to fund repairs.
The bonds were sold between 2016 and 2018 through the Illinois Finance Authority on behalf of Ohio-based Better Housing Foundation. They have since changed leadership hands.
When they were issued the bonds carried ratings in the triple-B and single-A categories depending on their senior or subordinate status. All are now junk-rated.
Problems have been brewing for some time: an August 2018 Chicago Tribune report noted that the foundation's buildings were in bad shape with little 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.
“The portfolios are all in financial distress,” BHF wrote in a voluntary disclosure posted April 22 on the Municipal Securities Rulemaking Board’s EMMA website. “Because of the condition of the facilities, the financial performance of the portfolios has been strained. As a result, none of the portfolios will be able to make the debt service payments due on the bonds on June 1, 2019.” Debt service reserves were tapped to cover the Dec. 1 payment and are now insufficient to cover the June payment.
The city has cited nearly all of the individual Chicago properties in the portfolios for numerous code violations, the BHF notice says.
Two BHF-owned suburban portfolios — Windy City and Blue Station — have been downgraded but are not facing impending default like the Chicago portfolios. A Windy City bondholder, however, voiced concerns that his holdings will be dragged down in price, even though cash flow remained stronger based on the most recent information BHF provided.
BHF representatives initially said last week they expected to provide an update on their financial stabilization plans on April 25, but then said their timing had shifted and they had no additional comment.
The foundation set up special purpose entities to own the housing stock on Chicago’s south side. Chicago Housing Group B LLC owns the Icarus Portfolio project with $51.8 million of bonds issued, BHF Chicago Housing Group C LLC owns the Ernst Portfolio, for which $19 million was issued, and Lindran Properties LLC owns the Shoreline Portfolio project, for which $13.6 million was issued.
Investors were warned in the offering statements that buying the bonds “involves a significant degree of risk” due to factors such as the limited sources for repayment and real estate and operating risks and that no assurances could be made that project revenues would cover bond repayment.
Over the last six months, those warnings came to fruition as the portfolios’ troubles spiraled, leading to the loss of the bonds’ investment grade ratings, city lawsuits, the loss of Chicago Housing Authority payments last year, and struggles to keep and attract residents.
A fresh warning from S&P Global Ratings came Friday along with downgrades to two suburban portfolios owned by BHF.
The fate of the housing stock and bondholder recoveries remains up in the air as BHF seeks funding to make about $3.5 million in repairs and upgrades. The foundation plans to ask bondholders to delay any enforcement actions. Bondholders too are looking at the best means to cover the cost of needed repairs and are considering their next step, according to a source close to bondholders.
The bonds are secured by a lien on the trust estate that includes loan agreements which obligate the borrower to repay the bonds. The trustee has a first priority lien on project revenues and the properties. While senior lien bonds are outstanding a failure to make debt service payments on the subordinate bonds doesn’t constitute an indenture default.
Stifel was underwriter.
Wilmington Trust NA is trustee on the Shoreline bonds. Holders of Icarus bonds recently replaced Wilmington with UMB Bank NA and holders of the Ernst bonds are in the process of switching to UMB, a source said.
BHF’s grace period to cure covenant defaults based on the condition of the property has ended and in an April 17 notice Wilmington reported that BHF’s failure had officially triggered defaults of the mortgage and bond indenture. Bondholders can now demand full repayment immediately and foreclose.
The holders of the majority of principal of the outstanding amount of senior bonds have a controlling interest and can direct the trustee on actions to take. “The trustee intends to take no further action unless directed by the controlling holders and provided with such adequate security and indemnity,” the Wilmington April 17 notice says.
BHF reported that discussions with a potential lender had stalled but that it’s in talks with a new funding source. To buy time, BHF board will seek 90-day forbearance agreements from Wilmington and UMB.
“BHF intends to use this time to negotiate with a new lending source to fund the repairs,” the notice says. It adds that the city is aware BHF is seeking forbearance agreements and actively looking for funds to pay for repairs and resolve its long-term debt problems.
A source close to bondholders said investors are frustrated by BHF’s refusal to provide the latest financials on the projects. If the court appoints a receiver in connection with the city code and housing ordinance violations that also could further complicate negotiations.
The source said a potential outcome in the coming months is a restructuring that includes funding to make repairs. It could be implemented through an agreed-to Chapter 11 bankruptcy.
“In order to restart cash flow you have to fix the problems. But in order to have these kinds of discussions bondholders need to know what the current cash flows are and the detailed repair costs. BHF has not been good about disclosure,” said a bondholder source. “The question also is where the capital will come from to make the repairs. Whoever puts in the money will control the capital structure.
“Bondholders are eager to resolve the problem and frustrated over the lack of information and they would like to know how this situation got so bad so quick,” the source said.
The source did not accuse any party of wrongdoing, but said more information was needed about the accuracy of information in offering documents.
Bonds tied to the three projects lost their investment grade ratings from S&P Global Ratings in October as their troubles mounted.
On Friday, S&P put the three Chicago portfolios’ CCC-minus ratings on CreditWatch with negative implications and stripped the one suburban housing bond portfolio of its investment grade ratings while lowering a second.
“As of April 23, 2019, the current chairman of the board of Better Housing Foundation has not responded to requests from S&P Global Ratings for information regarding the status of Better Housing Foundation's projects,” the rating agency said.
“We have assigned a 'vulnerable' management assessment to BHF, given the board's turnover, changes in property management at all five transactions, ongoing covenant defaults, and the lack of responsiveness to S&P Global Ratings' requests for information,” analysts added.
S&P will withdraw the rating in 30 days if unable to obtain further information about the projects.
— BHF borrowed $13.6 million for Shoreline in July 2016. It most recently traded at 42 cents on the dollar in April. Shoreline offered yields from 3.25% to 5.25% with a final 2051 maturity. The Shoreline bonds initially carried BBB/BBB-minus ratings. They financed the acquisition of a 13- property, 262-unit portfolio.
— BHF borrowed $51.8 million for the Icarus portfolio in May 2017. It most recently traded at 40 cents on the dollar. Icarus offered yields from 4.25% to 6.25% with a final 2052 maturity. The Icarus bonds originally were rated A-minus/BBB-minus. They financed the acquisition of the 45- property, 518-unit portfolio.
— BHF borrowed $19 million in March 2018 for the Ernst portfolio. It most recently traded at 50 cents on the dollar in April. Ernst offered yields ranging from 4.32% to 6.41% with a final 2053 maturity. The Ernst bonds were rated A/BBB-minus. They financed the acquisition of a 17- property, 186-unit portfolio of 17 properties.
S&P said as of last October, the combined occupancy rate was 68%. IFA documents reported the occupancy rates at 88% to 98% as of March 2018. The bonds were mostly tax-exempt although some small tranches are taxable.
The two suburban portfolios downgraded by S&P Friday total $85 million of debt.
— The suburban Windy City portfolio senior 2017 bonds were cut to BB from A-minus and the subordinate bonds lowered to B-plus from BBB-minus. The IFA issued $59.8 million of bonds for that portfolio in November 2017. The bonds financed the acquisition of a four-property, 528-unit portfolio in Addison, Glen Ellyn, Mundelein, and St. Charles. The bonds recently traded at 88 cents on the dollar, according to EMMA data.
— The senior Blue Island LLC for Blue Station project bonds issued in 2018 held on to its investment grade while being lowered to BBB-minus from BBB-plus. The subordinate bonds were dropped to junk at BB-plus from BBB-minus. The IFA sold $25 million of bonds for portfolio in May 2018, its final BHF deal. Proceeds financed the acquisition and rehabilitation of a 345-unit Blue Station multifamily apartment property in the south suburb of Blue Island. The bonds recently traded at 93 cents to 100 cents on the dollar.
BHF was established as an Ohio-based not-for-profit in 2015, according to IFA and bond documents. The BHF board at its April 2018 meeting — 10 days after approval of the final BHF IFA bonds — replaced most of its members.
Chicago-based Desak Development Corp. whose president is real estate investor L. Mark DeAngelis, provided consulting services to BHF on the financing and purchase. Another firm owned by DeAngelis provided management services. They have since been replaced.
As BHF was in danger of losing its local property tax exemptions last year, it struck a deal last August with Florida-based not-for-profit Invest in America’s Veterans Foundation Inc., which assumed control of BHF as its governing body. IAVF which was established in 2009 and had a relationship with BHF for supportive services involving the suburban properties. More board changes occurred.
The current board blames the portfolios’ woes on the previous boards and property managers. It also has sought to sell several of the portfolios.
Several lawsuits related to the projects are pending.
One of BHF’s former boards sued the property appraisal consultants seeking damages related to reports that BHF relied upon when purchasing the Shoreline portfolio. IAVF last year filed a lawsuit in federal court in Chicago suing Desak’s firms, accuses them of providing “deeply flawed due diligence prior to the purchase” and saying they then mismanaged the properties, according to a bondholders notice. The complaint seeks $10 million in damages. Desak denies wrongdoing and is seeking to dismiss the case.