CHICAGO — Redwood Capital Investments LLC’s successful bid Wednesday to acquire most of bankrupt Erickson Retirement Communities’ assets did not include the Monarch Landing, Sedgebrook, and Linden Ponds facilities so the fate of their municipal debt now becomes the focus of a new round of negotiations.

The assets of the subsidiaries and not-for-profit entities established in connection with the development of the facilities were not part of Erickson’s October bankruptcy filing.

Erickson did receive nonbinding offers for the facilities from its two qualified bidders who participated in the bankruptcy auction Tuesday and Wednesday, but the offers were not included in the auction process.

Instead, the terms could serve as starting points for a new round of negotiations, after the auction, with the bankruptcy auction winner or other potential bidders.

The qualified bidders were asked to submit offers that could serve as stalking-horse bids — the first official bids launching negotiations — in separate negotiations on one or all of the three facilities, according to an e-mail to investors from attorneys at Mintz Levin Cohn Ferris Glovsky & Popeo PC who represent the bond trustees. 

The e-mail reads that the various parties involved in the facilities will now “focus more directly on the workout” and that a review of the assets has been commissioned “to enable decisions to maximize bondholder value.” A source following the case said a workout plan could involve either a sale or restructuring of the bonds that may or may not involve Redwood.

The Erickson financing structure is complex and unique in the continuing care retirement community sector. While Erickson is a for-profit developer and manager and it provides capital for initial development costs, it develops its CCRCs through its for-profit subsidiaries that own the land. A nonprofit organization then leases the site from the subsidiary.

The subsidiaries are not part of the bankruptcy, but the complex flow of funds and the management contracts require “that the three facilities be a part of the resolution,” said one source following the bankruptcy.

The parent of most of the nonprofits is National Senior Campuses Inc. — also a not-for-profit organization. The nonprofits then contract with Erickson for management services. While Erickson is not the direct obligor of the debt, many of the borrowers rely on Erickson funds to help meet operating costs.

The Massachusetts Finance Development Agency sold $156 million of debt in 2007 on behalf of Linden Ponds Inc., including $101.3 million of fixed-rate bonds, $45 million of variable-rate bonds, and $10 million of taxable variable-rate securities. Debt service on the bonds is current and Erickson officials said earlier this month that construction — which was halted one month before the bankruptcy filing — will resume late next year and they expect bondholders will continue to be paid.

In 2007 the Illinois Finance Authority issued $137 million of bonds, comprised of $98 million of fixed-rate and $39 million of variable-rate bonds, on behalf of Sedgebrook Inc. in Lincolnshire. In the same year the IFA sold $178.7 million of debt — $128.7 million of fixed-rate bonds and $50 million of floating-rate bonds — on behalf of Monarch Landing Inc. in Naperville. Sedgebrook and Monarch defaulted on debt service payments over the summer.

A majority of bondholders of the Monarch and Sedgebrook bonds have entered into forbearance agreements that permit the trustee to withhold debt service payments without triggering any punitive actions, according to bondholder notices posted this month. The agreements, in place until Feb. 2, were entered into to preserve “greater flexibility for a potential resolution” of financial issues, notices read.

A fourth Erickson facility with outstanding tax-exempt debt is Ann’s Choice Inc. in Warminster, Pa.. In 2005, the Bucks County Industrial Development Authority sold $81.94 million of Series 2005A and Series 2005B bonds on behalf of Ann’s Choice. In that facility’s case, the landowning subsidiary was part of the bankruptcy process and Redwood acquired the assets, and it is expected the debt will continue to be paid.

Wells Fargo Bank NA serves as trustee on the Monarch, Linden Ponds and Ann’s Choice bonds, and US Bank serves as trustee on the Sedgebrook bonds. Mintz Levin represents the trustees.

The bankruptcy auction and Redwood’s successful $365 million cash bid marked the culmination of a process begun in October when Erickson — the operator of 19 CCRCs throughout the country filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Northern District of Texas in Dallas. The Maryland-based Erickson also in October signed a definitive sale agreement with Baltimore-based Redwood.

A second bid was qualified to compete in the auction from a group formed by Coastwood Senior Housing Partners LLC, the investment firm Kohlberg Kravis Roberts & Co., and the private-equity firm Beechen Petty O’Keefe & Co. Redwood prevailed in the bidding that began Tuesday morning and ended after 16 hours early Wednesday.

Erickson issued a statement that did not disclose terms of the transaction but sources who attended the meeting said the bankrupt assets were won with an all cash bid of $365 million.

Erickson — which will continue to operate as a management company — and Redwood submitted details of the deal to the bankruptcy court Wednesday and will seek court approval for a revised bankruptcy disclosure statement and confirmation of a plan of reorganization. 

“The transition of Erickson’s ownership to Redwood Capital will promote the long-term stability of the developing communities National Senior Campuses sponsors,” said NSC chairman Ron Walker. “We look forward to working with Erickson, under new ownership and with restructured finances, reorganized businesses, and fresh capital to fulfill NSC’s mission of providing the highest quality service and lifestyle to our residents.”

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