Bonds sold in 1996 to help finance an assisted-living facility in Cherry Hill, N.J., are in default after U.S. Bank NA, the trustee for the debt, dipped into reserve funds to meet July 1 interest and principal payments owed to investors.

The New Jersey Health Care Facilities Financing Authority, as conduit issuer, sold $15.8 million of tax-exempt Series 1996 bonds on behalf of Care Institute Inc., a nonprofit provider of nursing-home services and elderly residential living based in Indiana. The bonds are not rated. The notice of default indicated $13.74 million of the uninsured Series 1996 bonds due in 2027 remain outstanding.

The company was $40,635 short in its June payment to U.S. Bank, forcing the trustee to tap into the debt service reserve fund for that amount to bridge the shortfall and pay the full $1.46 million owed July 1 to bondholders.

“So, it’s a relatively small percentage of the total payment that was due,” said Jim Van Wart, the HCFFA’s director of operations and finance.

The next payment to investors is due July 1, 2010.

U.S. Bank declined to comment. Care Institute did not return a phone call seeking comment.

This is the second time that U.S. Bank has used reserve funds to pay owners of the Series 1996 bonds after Care Institute fell short in its payments, but the nonprofit caught up shortly afterwards, Van Wart said.

“Historically, they have made their [monthly] payments, with the exception of one other occasion. There was one other draw that was made on the debt service reserve fund, but it was repaid shortly thereafter,” he said.

Bondholders have offered Care Institute forbearance agreements in the past when the company experienced default events such as insufficient days’ cash on hand and inadequate debt service coverage in accordance with bond covenants. Those default events included having zero days’ cash on hand during 2008 and an average debt service coverage in 2008 of 0.72 times. Under its bond agreements, Care Institute must have 45 days’ cash on hand and debt service coverage of 1.2 times, according to the default notice.

“They’ve been working with the bondholders,” said HCFFA executive director Mark Hopkins. “And they’ve had several waivers from the bondholders in the past.”

Bondholders include investors such as high-yield bond funds.

Care Institute pays a hefty interest rate on the bonds of 8% with no refinancing available at this point.

“I don’t think the market would be there for them,” Van Wart said.

Along with the high monthly interest costs, Cherry Hill Township in Camden County, about five miles east of Philadelphia, has numerous assisted-living facilities that vie for retirement and elderly residents.

“The competition is so fierce that they have to sometimes offer incentives to get people to move into their facility,” Van Wart said. “And as soon as they do it, then their competitors start to do it. Cherry Hill has quite a number of assisted-living facilities.”

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