Default seen likely for operator of senior centers in Michigan and Ohio

Bonds used to buy eight senior living properties in Michigan and Ohio are likely to default within six months, S&P Global Ratings said.

On Dec. 21, S&P placed bonds issued for Great Lakes Senior Living Communities LLC — already rated deep in the speculative grades at CCC-minus — on CreditWatch with negative implications.

The bonds were sold through conduit issuer Arizona Industrial Development Authority.

"The ratings reflect our view that a default, distressed exchange, or redemption appears to be inevitable within six months, absent unanticipated significantly favorable changes in the project's circumstances," the rating agency said in its release. 

Daniel Pulter, an S&P associate director, said Great Lakes lacked the cash flow to make its July 1, 2023, interest payment, causing it to draw down its series B and C debt service reserve funds.

With no sign that those funds were refilled, and without any disclosures of funds available for debt service, S&P saw a one-in-two likelihood that Great Lakes is facing another shortfall.

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"The CreditWatch placement reflects the potential for a shortfall in funds available for debt service on the Jan. 1, 2024, principal and interest payment date… which could prompt a second consecutive draw on transaction debt service reserve funds and other reserves to make full and timely payment or result in a payment default if reserves are insufficient," Pulter said. "Either of these scenarios could result in a negative rating action on the bonds, with a payment default resulting in a lowering of the ratings to D."

There were $376.2 million in the 2019 bonds outstanding as of Dec. 31, 2022, plus $19.5 million in fourth- and fifth-tier parity bonds issued in 2021 to fund additional capital needs on the project.

This rating action follows a 2021 forbearance agreement with bondholders that saw E Series holders waive interest payments to allow Great Lakes to cope with pandemic-related cost increases and lowered occupancy rates.

The 2019 deal financed the purchase of eight existing standalone senior living properties in Ohio and Michigan.

S&P first downgraded all the Great Lakes 2019 bonds to junk ratings in June 2020.  

S&P's Pulter pointed to "years of occupancy levels and operating costs trending unfavorably to budget." 

The parent of Great Lakes Senior Living Communities, Provident Resources Group Inc., is a 501(c)(3) nonprofit based in Baton Rouge, Louisiana. 

Pulter told The Bond Buyer that after talking to Provident management, S&P came to understand that "no resources or funds were available or committed at the parent level to support the project in the event of distress." Bond proceeds alone funded the acquisition of properties in Michigan and Ohio, and neither Provident nor Great Lakes contributed any equity toward the expansion.

The 2019 bonds priced a year before the COVID-19 pandemic hit, with senior living among the hardest hit sectors.

"There is no doubt that the pandemic had a significant impact on all of the Great Lakes properties, and we continue to work hard to recover," Provident Chairman and CEO Steve Hicks said, noting that Great Lakes' forbearance agreement remains in place. "We also continue to work collaboratively with our bondholders to resolve the issues we confront."

Provident was founded in 1999 and reports having financed $5 billion for development, ownership and operation of educational, healthcare, senior living and housing facilities.

In 2021, the last year for which IRS records are available, it brought in $208.2 million in revenue while reporting $293.6 million in expenses, a negative $85.3 million — and a deterioration from the previous year's negative $75.2 million, according to IRS Form 990 disclosures.

By end of year, it had $2.45 billion in assets and $2.86 billion in liabilities, a gap of negative $413.6 million, up from negative $334.3 million a year earlier.

Hicks, a career bond attorney who founded Provident in 1999, received $912,557 in reportable compensation in 2021 as CEO and chair, according to its IRS Form 990 filing. His son, Christopher Hicks, the executive vice president for capital markets and corporate development, received $569,354.

In recent years, Provident has moved into the student housing space. Its website cites 17 student housing projects in nine states.

The student housing sector was also buffeted by the pandemic.

Provident also ended up in a legal dispute over a student housing project it built at the University of Oklahoma, alleging in its suit against the university that the school's cancellation of leases on a parking garage and commercial space in the Cross Village student housing complex eliminated about a third of revenues pledged to annual debt service and raised prospects of default.

As part of the settlement of the lawsuit, the university agreed to buy the apartments from Provident.

In unaudited interim summary statements provided as part of the forbearance agreement, Provident disclosed that Great Lakes had $94,655 of bad debt as of July and its total long-term liabilities grew from $383.1 million to $383.4 million over the first half of 2023. Meanwhile, the assets held by the trustee fell by $10.1 million from Dec. 31, 2022, to July 31, 2023, dropping from over $15 million to $5 million in seven months.

Conduit issuer Arizona Industrial Development Authority is a nonprofit arm of the state of Arizona that issues municipal bonds for private and public projects and is known for issuing debt beyond Arizona borders. It's not on the hook for the bonds it issues, but it's no stranger to seeing its debt default.