Final bondholder payouts expected in the coming months for the final two in a set of five troubled affordable housing projects in the Chicago area may set the stage for bondholders to pursue securities lawsuits.
Trustee UMB NA, which represents holders of the $170 million of debt issued for the Better Housing Foundation projects, reported that it is working to connect bondholders with a securities litigation firm this spring. Whether that leads to a lawsuit is yet to be decided.
“The trustee has previously asked a securities litigation firm to review the facts and circumstances surrounding the issuance of the bonds. The trustee will host a call for the benefit of holders to go over the conclusions of that review,” UMB wrote in March and April
All five of the portfolios entered bankruptcy last year to clear the decks for auctions of the portfolios free of debts, with the first in January 2020 and the last entering Chapter 11 in December.
Final payments that imposed steep haircuts on the three Chicago-based portfolios have gone out to holders. Two distributions were recently made for a fourth portfolio that is located in suburban Chicago and another small one is expected. The fifth portfolio, also in the suburbs, remains in bankruptcy. The level of haircut has depended on each portfolio's condition, other secured debts that have piled up, and competition for the properties at auction.
As
UMB Bank NA — which took over the trustee role from Wilmington Trust NA at bondholders’ request — told investors its role was limited to resolving the defaults based on the bond indentures. Further litigation would need to be pursued on a separate track but the trustee said it could help facilitate that examination.
“The existence or absence of claims surrounding the issuance of the bonds are outside of the trustee estate created by the Indenture and belong individually to initial purchasers of the bonds,” UMB wrote in recent notices.
The trustee is asking investors to submit information on their holdings to allow the litigation firm to consider whether any conflicts exist. “Once the firm has run conflict checks, the trustee anticipates holding a call for bondholders with members of the firm,” UMB wrote.
Sources following the case say no decision on a lawsuit has been made and bondholders could go their own route with a law firm of their choosing.
In the first bankruptcy filing, it was disclosed by the current operators of BHF that it received SEC subpoenas seeking records it inherited from the original owners. The city of Chicago Law Department confirmed at the time that it discussed the fiasco with the Illinois Attorney General’s office.
The bonds were sold through the Illinois Finance Authority, many with triple-B to single-A ratings from S&P Global Ratings. Stifel Financial Corp. underwrote them.
The bond proceeds financed the acquisition and some rehabilitation costs for the dozens of buildings with about 2,000 units across the five portfolios. 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. Many remained uninhabitable and Chicago eventually stepped in and sought housing court receivers.
BHF management and control was reconstituted on several occasions.
The Chicago-based Shoreline, Icarus, and Ernst portfolios defaulted in June 2019. The suburban Windy City and Blue Station portfolios were in better shape with healthy occupancy rates but they too were dragged into BHF’s financial struggles as the borrower lost its tax-exempt status so was required to pay some taxes. The
The brewing problems were detailed in an August 2018
Despite new leadership at the Ohio-based foundation, efforts to solve poor conditions faltered. BHF’s current leader, Andrew Belew, blamed his predecessors and the IFA voiced frustration about the stigma associated with being the conduit issuer, saying it relied on the investment-grade rating reports and support from local authorities.
Bankruptcy
All five portfolios entered Chapter 11 under section 363 of the code that allows for the sale of assets free and clear of liens, claims and interests. Judge Jack B. Schmetterer, who presides in the Northern District’s Eastern Division in Chicago, has overseen the cases.
All of the sale agreements call for the new buyers to invest funds for repairs and in the cases of the three Chicago portfolios, city officials signed off.
The trustee could have pursued foreclosure as permitted under the bond indenture but that’s a time-consuming process and would likely result in a weaker recovery given the poor condition of the properties and mounting liens, lawyers said.
“The properties are in the hands of buyers that can take care of them and there are distributions going to note holders that if the properties just sat there or were foreclosed up on would have resulted in no payout,” one lawyer following the case said this week.
As a not-for-profit, BHF couldn’t be forced to file bankruptcy and BHF was unable to find additional capital to make repairs.
Shoreline
BHF borrowed $13.6 million for the portfolio. The final bond claim was set at $14.8 million and the trustee made a
Lindran Properties LLC, an affiliate of BHF that served as owner of the Shoreline portfolio, filed Chapter 11 January 31 after reaching agreement with stalking horse bidder PRE Holdings 14 LLC, which offered $3.9 million for the 13 buildings with 260 units.
The court approved the spring auction last June. No other bidders stepped forward and the court approved a distribution plan in September and the case closed Nov. 9. One source following the cases believes COVID-19 hurt the Shoreline sale because it was conducted as the pandemic was worsening and the economy shut down with travel at a near standstill, so it didn’t draw much attention.
The bonds traded earlier this year at 10 cents on the dollar, according to trade data on EMMA.
Icarus
BHF borrowed $51.8 million for the Icarus portfolio in Chicago that includes a 45 buildings with 545 units.
The final bond claim was set at $56.7 million. After payment of the trustee expenses, $8.16 million was
Icarus filed for Chapter 11 June 15 after reaching a real estate purchase and sale agreement May 26 with Saybrook Municipal Opportunity Fund VI as the stalking horse bidder with a bid of $15.15 million.
The portfolio fared better than Shoreline as it drew other offers at an Oct. 2 auction including a top bid of $18.6 million from Longwood Development Corp. and Atlas Asset Management Services Corp. The court approved the sale Oct. 28.
The bonds traded earlier this year at 15 cents on the dollar.
Ernst
BHF borrowed $19 million for the Ernst portfolio that includes 17 buildings with 182 units in Chicago.
The final bond claim was set at $20.6 million and a
BHF reached a sale agreement with PRE Holdings 15 LLC to serve as a stalking horse with a $4.5 million bid and Chapter 11 was filed Sept. 1.
At the Nov. 5 auction, five bids were received with the top one for $8.75 million submitted by BHF Acquisition LLC. The court approved the sale Nov. 17.
The bonds traded last November at 14 to 17 cents on the dollar.
Windy City
BHF sold $60 million of bonds for the suburban Chicago Windy City portfolio of more than 500 units in various western suburbs with properties lumped into several individual groups managed by BHF.
A final bond claim was set at $65.3 million, including $54 million of senior bonds and $8.5 million of subordinate bonds. The trustee made an initial distribution of $34.5 million last month with most applied to senior bonds and $312,434 applied to the subordinate bonds.
An additional distribution of $4.7 million was expected this week to senior bondholders and a small final distribution is expected later this spring, according to an
The various entities filed Chapter 11 Oct. 7. BHF reported a stalking horse bid of $39 million from ACG Iowa Acquisitions LLC, according to a Sept. 25
At a Dec. 4 auction, a top bid of $42 million came from the firm Second City.
The bonds most recently traded at 73 cents on the dollar in March.
Blue Station
BHF sold $25 million of bonds for the 345-unit Blue Station portfolio in south suburban Blue Island. It remains in bankruptcy. It struck a sale agreement Nov. 19 with Kinzie Assets LLC that paved the way for a Chapter 11 bankruptcy filing last December. Kinzie had offered $15.1 million and served as a stalking horse bidder.
No other bidders stepped forward and the sale closed March 16 generating net sale proceeds of $12.55 million. An additional $665,000 of funds are held by BHF bringing the total pot to $13.2 million but bondholders won’t receive all of it.
“The sale proceeds and cash-on-hand are subject to the liens and security interest of the Trustee,” reads an April 20 bankruptcy filing. A status hearing is set for May 11 and a final distribution hearing is expected June 29.
The bonds traded at 65 cents on the dollar this month.
