Illinois' largest senior living retirement community has turned to bankruptcy court to manage an auction and sale process that will impact recovery rates for holders of its $125 million of outstanding defaulted municipal bonds.
Friendship Village of Schaumburg couldn't overcome the fiscal setback of COVID-19 on its operations and after negotiations with bondholders and struggles to find a buyer turned to Chapter 11 to facilitate a sale that would free the buyer of debts and liens.
Evangelical Retirement Homes of Greater Chicago, which does business as Friendship Village of Schaumburg,
"At this juncture, stakeholders believe the best solution is to utilize the bankruptcy process to run a marketing and sale process to select a potential purchaser and, after an auction, a winning bidder," Friendship Village said in a statement.
In the Chicago suburbs 30 miles from the Loop, Friendship Village of Schaumburg was established in 1977 as a continuing care retirement community, although it's now known as life plan community.
It reports being the largest LFP in Illinois and 16th largest in the United States, able to house 1,000 seniors at full capacity in 815 independent, assisted living, memory care, and nursing units.
"In the Friendship Village restructuring process, all parties involved, from the bondholders who financed the projects to the directors, management teams, and the legal counselors, are working to maximize recovery to all stakeholders, which includes resident refund obligations, to help the community flourish and to help maintain the trust in the industry and investment sector," the organization's statement said.
It's asking the court to approve a timeline for the marketing, auction, and then sale of the assets which it contends will maximize value and recovery potential for FVS's creditors and stakeholders. The first hearing was scheduled for Tuesday afternoon.
Bond trustee UMB Bank NA holds a perfected first priority security interest in the campus and all tangible and intangible personal property owned by the debtor.
The bond debts secured by the liens and security interests include a $122.55 million 2017 issue sold through the Illinois Finance Authority with $120.8 million still owed including $115.2 million in principal and $5.6 million in interest. Evangelical Retirement Homes of Greater Chicago, Inc. also took out a direct note obligation for $13.75 million with $10.27 million still owed.
The unrated bonds that carry a final maturity in 2045 are trading at around 30 cents on the dollar, according to
The bonds refunded outstanding debt. FVS in 2005 had sold $130 million of variable-rate bonds to refund bonds sold in 1994 and 1997 and raise new-money proceeds for the construction of a new residential independent living complex and a multipurpose community center on its campus.
The facility will continue operations throughout the sale process. "By taking these steps toward a healthier financial structure, FVS will gain the financial flexibility to make material improvements that will further enrich our campus, amenities, and services," Mike Flynn, president and chief executive officer of FVS, said in the statement.
The pandemic damaged the pipeline of entrance fees that serve as a primary source for debt repayment.
"Without the ability to tour prospects for nearly a year, occupancy dropped significantly, leaving Friendship Village with the financial hardships that are being resolved through this debt restructuring process," the statement said.
FVS announced in January 2021 that it was suspending debt service payments and failed to make scheduled monthly payments of principal and interest which triggered events of default under the bond documents. It made note payments due in August and September 2021 but failed to make subsequent payments.
The trustee made the scheduled $2.975 million interest and $2.555 million principal payments due in February 2021 from funds on hand with $990,512,000 coming from the debt service reserve fund.
After moving various funds around, the trustee held $103,840.80 in a bond sinking fund and $7.5 million in the debt service reserve.
With defaults continuing, UMB last April
In August, UMB at the direction of a majority of holders
In March 2022, FVS hired Ziegler to advise on a sale.
"Ziegler received 'letters of interest' from a handful of entities who expressed interest in acquiring the debtor or its assets. The highest bid received was unacceptable to the debtor and the bond trustee," bankruptcy documents said.
Between August 2022 and October 2022, FVS, UMB, and Ziegler sought to negotiate a higher bid but the party agreed only to consider having its bid serve a "stalking horse," or starting point, in a final public auction.
The highest bidder also changed its bid to an asset purchase transaction from an originally proposed affiliation and so FVS brought in Grandbridge Real Estate Capital LLC to assist.
In January, Grandbridge and the debtor signed an exclusive brokerage agreement for the property.
By March 1, Grandbridge completed its due diligence and in anticipation of a second round of bidding, Grandbridge prepared a list of buyer prospects.
Then in March, Grandbridge circulated its proposed form of a marketing "teaser" for prospective buyers but the highest bidder and potential purchaser told FVS and UMB that it wanted to conduct its purchase through the bankruptcy process.
Under the timeline being proposed, FVS will decide by Aug. 24 whether to include a stalking horse agreement in the bid process. Bids would be due by Sept. 29 and an auction, if necessary, would be held at the offices of Polsinelli PC in Chicago on Oct. 3. Objections would be due by Oct. 5 and FSV proposes asking the bankruptcy court for approval as soon as Oct. 10.
FVS reports having limited liquidity to maintain operations.
"The debtor believes that this timeline maximizes the prospect of receiving the highest and best offer while taking into consideration the debtor's liquidity constraints," the Chapter 11 filing says. "Grandbridge will not place any conditions on potentially interested parties regarding bid levels, structure, financing, or management in connection with the solicitation of indications of interest."
FVS was among 16 senior living defaulters with a collective $1.46 billion of outstanding debt between mid-2020 and April 2022 that Moody's Investors Service directly attributed to the pandemic's impacts, Moody's said in a
The retirement sector stood out among the hardest hit in the early days of the COVID-19 pandemic and the pain lingers for senior living, amplified by more recent stress afflicting the entire healthcare sector, including inflation and labor shortages.
Persistently high wage inflation remains a major credit risk for U.S. life plan communities and skilled nursing facilities given the very tight labor environment, Fitch Ratings said in a report published this week.
LPC and SNF payrolls remain well below pre-pandemic levels.
"High fee increases at LPCs will help alleviate wage pressures, but this practice is not sustainable over the longer term to maintain profit margins," said Richard Park, a Fitch director. "LPCs and communities with a significant SNF component will have to execute on productivity enhancements, cost savings and manage skilled nursing admissions to successfully operate through the current reality of tight staffing conditions and higher unit labor costs."
More than 16% of nursing homes are reporting a shortage of nurses and aides. The number of quits in the healthcare and social assistance sector remains high compared to recent averages.
Despite the pressures and notable problem credits, fiscal 2021 medians for U.S. continuing care retirement communities showed some in the rated category managing well despite mounting industry pressures, S&P Global Ratings said in an April report. S&P rates 18 not-for-profit senior living obligors.
"Historically, rated organizations in this sector have demonstrated solid stability," said S&P analyst Wendy Taylor. "While we expect this to continue given that most maintain a stable outlook and the underlying long-term business model remains sound, we recognize that mounting industry pressures and evolving macroeconomic factors could have enough of an effect to disrupt sector stability."
