Foundation's Chicago affordable housing defaults spread to suburban portfolios

The Better Housing Foundation bond mess that led to defaults on $84.4 million of debt sold for three Chicago-based affordable housing portfolios has spread to two suburban portfolios with $60 million of outstanding debt.

First-time payment defaults occurred in December on $60 million of affordable housing bonds BHF sold for the Windy City suburban portfolio and $25 million for the Blue Station suburban portfolio. Both have recently been trading around 44 cents on the dollar, according to trade data on the Municipal Securities Rulemaking Board’s EMMA site.

A bondholder call for the Windy City holders is set for Wednesday. UMB Bank NA recently took over as trustee from Wilmington Trust NA and is now trustee for all five portfolios owned by the BHF, which issued the tax-exempt bonds through the Illinois Finance Authority.

A December filing from Wilmington notified Windy City bondholders of the payment default which in part was triggered by covenant defaults that allow for the withholding of debt service payments.

The borrower violated provisions the loan agreement requiring adequate rental collections to meet debt coverage requirements and failed to hire a management consultant as laid out in the bond loan agreements.

“As a result of the restriction on the release of funds created by the event of default…the debt service payment due to the holders on December 1, 2019 was not paid,” the Windy City default notice reads. The trustee can now move with written request from controlling holders to declare the outstanding principal balance and all interest accrued immediately due and payable.

Additional covenant defaults have occurred. The borrowers owed $1.5 million in property taxes at the end of 2018 and have not fully paid down the balance with additional bills piling up. The borrower currently owes about $1 million. The failure to pay property taxes before they are delinquent is an immediate default of the bond loan agreement.

On December 2, holders of a majority in outstanding principal amount on the Blue Station bonds told the trustee to withhold the December interest payment.

“This direction was intended to allow the successor trustee to determine whether events of default presently exist and whether the funds necessary to make payment of amounts then due and payable on the bonds were sufficient without drawing from the Debt Service Reserve Fund or other bond accounts,” reads a Jan. 8 notice from UMB.

BHF president Andrew Belew said the foundation continues to make the payments needed to cover debt service and it wasn't a shortage of funds that drove the defaults.

“We made all payments to the trustees,” Belew said. “Bondholders made an election to suspend” debt service payments. "That was their choice. I have no opinion on what the bondholders do with their money.”

Belew said the suburban portfolios continue to operate and generate revenue and are at occupancy levels in the high 80% percentile and should be “just fine.”

The defaults are the latest development for the bond deals that have soured for investors with the headaches extending to the city of Chicago housing court and finance team members who investors are threatening to pursue as potential recoveries remain uncertain.

Bonds for all five portfolios were issued between 2016 and 2018. At issuance they carried ratings in the triple-B and single-A categories, depending on their senior or subordinate status. The fell to junk before the defaults.

When the Chicago portfolios began unraveling over the last year, holders of the suburban portfolios held out hope that their investment would hold up because of healthier financials with the housing stock in better shape and better occupancy levels.

Some funds, however, may have been transferred from the suburban portfolios to the Chicago portfolios of Icarus and Shoreline. The trustee — represented by McDermott Will & Emery — is examining the potential transfer, according to bondholder representatives who said such a transfer would violate the bond indenture. Belew declined to comment.

Questions over the status of the suburban facilities began mounting last year and financial information dried up as was previously seen with the Chicago portfolios.

S&P Global Ratings in July suspended its long-term ratings the Windy City Portfolio Project 2017 A and B series bonds which then were rated BB and were on negative watch while a C series carried a B-plus rating, also on negative watch.

The 2018 Blue Island LLC portfolio A bonds had been rated BBB-minus, on negative watch, and a B series was rated BB-plus on negative watch.

"The suspension of the ratings follows our inability to obtain timely information of satisfactory quality to maintain the rating on the bonds in accordance with our applicable criteria and policies," said S&P analyst Raymond Kim. “Accordingly, we are unable to verify the net cash flow of the projects, a figure we rely on to calculate debt service coverage on the series 2017 and 2018 bonds.”

The two had suffered credit erosion but payments had remained in good standing until December.

BHF defaulted on its bonds borrowed to purchase the housing stock in the Chicago portfolios known as Icarus, Ernst, and Shoreline on June 1.

The Chicago-based portfolios stumbled out of the gate with reports of code violations, dwindling occupancy, and the loss of Chicago Housing Authority voucher payments.

Amid turnover in BHF leadership, efforts to deal with those problems faltered, and BHF lacked the funds for repairs.

Court-appointed receivers now control the Chicago housing stock and could eventually petition the court to foreclose on the properties in an effort to recoup their expenditures, which hold senior lien status. The housing court has ordered the sale of some facilities and purchasers of the housing stock’s delinquent property tax payments could also eventually move to take title. Overdue water bills and other liens filed by a former manager have also added up. Occupancy is at best 15%.

The trustee is in discussions with BHF that bondholder representatives say could lead soon lead to an agreed-to Chapter 11 bankruptcy filing under section 363 that allows for the sale of assets. Because BHF is a not-for-profit it must be a willing participant. The trustee can’t force an involuntary bankruptcy proceeding to restructure the bonds.

Belew said he expects a resolution on two of the three Chicago portfolios to be announced in the next 45 days. “Action will happen.”

The various debts complicate the trustee’s efforts to raise the capital needed to fund repairs necessary to clear housing code violations and raise occupancy levels.

On a bond call last fall for one of the portfolios, holders asked for the odds that they would get “all” or “some” of their investment back.

Trustee attorney William Smith told them “it's difficult at this point” to say. Property condition reports and appraisals were ordered and the bonds’ underwriter, Stifel, covered that cost.

During bondholder calls last fall, investors voiced their frustration about the swift fall the bonds took from investment grade ratings to default and some raised the specter of potential fraud in estimates of the project’s fiscal prospects. Some also questioned whether the underwriter should be pursued for additional costs.

All options remain on the table as bondholders seek to recoup their investments, said several sources.

The brewing problems were detailed in an August 2018 Chicago Tribune report that highlighted the poor condition of the foundation's buildings and reported that that little was 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.

Despite new leadership at the Ohio-based foundation, efforts to solve poor conditions have faltered and all parties agree that a cash infusion is needed. Current managers blame their predecessors. Several lawsuits related to the projects are pending.