CHICAGO — The Illinois Finance Authority board signed off Thursday on a $90 million financing package for Clare Oaks continuing care retirement community in suburban Chicago as part of a Chapter 11 reorganization plan submitted by bondholders.
Judge Pamela S. Hollis of the U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division, approved the confirmation plan submitted by the bond trustee Wells Fargo NA and letter of credit provider Sovereign Bank NA for Clare Oaks at a hearing Nov. 15.
The IFA was expected to consider the bond exchange at its meeting earlier this month but staff and board members raised some concerns. The IFA serves only as a conduit on the issue with no financial risk, but with its name attached to the issue officials there wanted some greater assurance of the project's future viability.
With a feasibility study in hand showing stronger debt service coverage ratios and a commitment that the new Clare Oakes board will include some members with financial backgrounds, the IFA board approved the financing at a special meeting Thursday.
The authority issued $113 million of fixed- and floating-rate securities in 2006 for the project. Ziegler Capital Markets served as underwriter. The bonds financed the construction of the facility in Bartlett and repayment of loans to its sponsoring organization the Sisters of St. Joseph of the Third Order of St. Francis Inc.
The facility opened in 2007 and currently provides 130 independent living units, 31 assisted living and specialty care units, and 97 skilled nursing beds, according to IFA documents.
Like other facilities of its kind, its balance sheet struggled in the aftermath of the housing market crisis. Its occupancy levels fell short as seniors struggled to sell their homes and grappled with declines in their investments, said Pam Lenane, a vice president at IFA.
Clare Oaks depleted its operating and debt service reserves, missed bond payments, and then filed a voluntary bankruptcy petition in December 2011. It continued operations under debtor-in-possession financing.
Under the restructuring plan, the IFA will sell $90 million of bonds in three series. The first for $14 million will 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.
The 2006 holders would exchange their securities for two new series of tax-exempt refunding bonds totaling $75 million — a B series for $40 million and a C series for $35 million.
The bonds will be secured by a gross revenues pledge provided under the master indenture and by a first mortgage lien provided under the borrower's leasehold mortgage and security agreement. The A bonds hold 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 and underwriter. The trustee is represented by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo PC. Jones Day is the bond counsel on the new issue.
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.
Over the course of the year, Clare Oaks had engaged in discussions with the secured creditors regarding a bond exchange but an agreement could not be reached. It searched for a buyer and had negotiated a stalking horse purchase agreement with a for-profit buyer for $16 million. After various costs, that price translated into a roughly $10 million recovery for secured creditors led by bondholders.
"Given the anticipated low recovery to creditors under the corporation's proposed sale of assets, the master trustee and Sovereign Bank, N.A. objected to the corporation's sale procedures" and undertook its own restructuring effort, according to IFA documents.
The order will no longer serve as the sponsoring organization although it will remain involved with the facility.