Chicago is seeking court-appointed receivers to take charge of the housing stock in three affordable housing portfolios acquired by a not-for-profit with proceeds of $84.4 million of now defaulted bonds.
The receivership petitions mark the latest development in a saga over the projects that has left bondholder prospects for recovery uncertain. The worries are reflected in the hit to bond values seen in this month's trade data on the Municipal Securities Rulemaking Board's EMMA site.
The bonds for the Shoreline, Icarus, and Ernst portfolios were sold between 2016 and 2018 through the Illinois Finance Authority on behalf of Ohio-based Better Housing Foundation to acquire and renovate the housing stock in Chicago.
After a change in leadership, efforts to address poor conditions that have led to code violations, dwindling occupancy, and the loss of Chicago Housing Authority voucher payments have faltered, and BHF lacks the funds for repairs.
Some housing court dates have already occurred and others are scheduled through October, according to a June 11 informational filing from Better Housing Foundation, which defaulted on the June 1 debt service payment owed to bondholders.
BHF sought to use the receivership petitions to persuade bondholders to support funding for the repairs that are needed to cure housing code violations. Funds spent by the receivers hold a senior lien on project revenues and could impede efforts by BHF or a future owner to fix the housing stock, BHF argued.
“BHF believes it is imperative for all stakeholders to engage in negotiations in order to immediately address the underlying issues and direct the trustee to release a portion of the funds it currently holds so that such issues can be addressed and the receiverships avoided,” the
UMB Bank NA, selected to replace Wilmington Trust NA by holders of the three now-defaulted BHF portfolios and two other suburban ones that remain in good standing, did not budge on the request for funds from BHF, which until the June 11 filing had failed to respond to repeated requests for financial data.
The trustee, which has been in communications with the city, reported the impending receiverships in a filing June 20. The trustee is uncertain how the borrower “intends to address its inability to protect” the various portfolios,” notices to bondholders read. “The costs associated with such receivers, including expenses to protect the properties, will become a senior lien on the properties.”
At BHF’s request, the trustee has set up a call for Shoreline holders on June 26 for BHF “to give the borrower’s assessment of the situation and to answer questions,” reads a J
A meeting with Icarus and Ernst holders is in the works “to give the holders an overview of the portfolios and respond to any questions from the overview or the information disclosed earlier" reads the UMB notice that was labeled “
The trustee is not opposed to what amounts to a short-term guardianship of the housing stock, as it will speed up some repair work needed to keep apartments occupied and generating revenue, sources said. It also sets the stage for negotiations with BHF over a path forward that likely includes the need for a third-party funding source and could eventually result in some form of debt restructuring.
Previous loan agreement defaults were triggered, and the ongoing and new default triggers remedies that allow for bondholders to demand immediate repayment of the bonds or foreclose on the property.
S&P Global Ratings cut the ratings to D from CCC-minus on Shoreline’s 2016 bonds, Icarus’ 2017 bonds, and Ernst’s 2018 bonds after the June default.
When they were issued, the bonds carried ratings in the triple-B and single-A categories, depending on their senior or subordinate status. All are now junk-rated, including the suburban Windy City and Blue Station suburban portfolios, which remain in good standing.
The $13.6 million of Shoreline bonds sold in 2016 have recently traded at 34 cents on the dollar, down from 45 cents earlier this month. The $51.8 million of Icarus bonds sold in 2017 traded this month at 30 cents on the dollar, off from trading levels of 45 cents on the dollar. The $19 million of Ernst bonds sold in 2018 traded recently at 30 to 32 cents, down from 42 cents on the dollar earlier in June.
Problems had been brewing for some time as detailed in an August 2018
The current board blames the portfolios’ woes on the previous boards and property managers. It also has sought to sell several of the portfolios. Several lawsuits related to the projects are pending.
McDermott, Will & Emery represents UMB.
