Lingering pain for senior living bonds spurs bankruptcy cases in Texas

The municipal bond market’s senior living sector, which took a big hit from the COVID-19 pandemic, is still struggling with bankruptcies filed in Texas and new defaults expected to pop up next year.

A BofA Global Research report last week said the nursing home/senior living sector accounted for 46% of the $1.33 billion in first-time payment defaults so far this year. For 2023, these defaults are estimated to total $1.7 billion to $2.1 billion.

“Most likely, those defaults will come from the nursing home/senior living sector, followed by the hospital, student housing and industrial development sectors,” the report said.  

Fitch Ratings on Monday assigned the sector a “deteriorating outlook” for next year. While demographic trends will continue to support healthy demand, the sector faces significant headwinds from inflation, labor pressures, and other factors that could stall its continued recovery from the pandemic, the rating agency said in a report.

The years preceding the pandemic saw an escalation in high-yield borrowing for senior living facilities and deals were structured with the assumption required occupancy levels would materialize before the bonds’ capitalized interest ran out, according to Lisa Washburn, a managing director at Municipal Market Analytics. 

“The senior living sector, the retirement sector were significantly hit during the pandemic and that just accelerated some of the troubles that were perhaps going to be coming down the road with occupancy,” she said, noting that labor and other costs also rose as occupancy levels fell. 

Added complications include a depressed housing market, which could make it harder for seniors to sell their homes to finance their access to these facilities and bigger borrowing costs for new or refinanced debt due to rising interest rates, according to Washburn. 

“On the positive side, for a good facility, there’s definitely demographics on the side of needing facilities to care for an aging population,” she said.

In a September report, Fitch said the sector has been able to pass on increasing costs through rate and fee increases, “leading to relatively stable operating performance” year to date.

“However, should these inflationary pressures persist beyond 2022, (nonprofit life plan communities) may encounter resistance from residents to the substantial rate increases that may be required to offset the added cost pressure,” the report said. “This, in turn, could pressure operating performance and negatively impact future demand from prospective residents.”

The Southwest region has had its share of missed bond payments with Texas ranking second behind Florida for the number of first-time payment defaults on bonds issued for independent and assisted living, skilled nursing, and other facilities for seniors since 2009, according to MMA data. Oklahoma ranked ninth.

After defaulting, Texas nonprofits landed in bankruptcy court this year. 

Christian Care Centers, which operated three senior living communities in the Dallas area, could be nearing the end of the Chapter 11 bankruptcy it filed in the Northern District of Texas federal court in May. 

Last week, Judge Stacey Jernigan scheduled a Jan. 30 hearing for final approval of a disclosure statement and confirmation of a bankruptcy exit plan.

Back in May, Christian Care said it owed $50.8 million in outstanding principal and $3.256 million in unpaid interest on bonds it sold in 2014 and 2016 through the Mesquite Health Facilities Development Corporation, while its assets totaled about $52.4 million. The debtor turned to bankruptcy because an asset sale was not likely to pay bondholders in full, its representative said at that time. 

In July, the judge approved the sale of all Christian Care assets to North Texas Benevolent Holdings for $44.25 million.

In the years preceding bankruptcy, Christian Care failed to meet certain bond covenants, defaulted on payments, and entered into forbearance agreements with bond trustee UMB Bank, according to a court filing.

Another Texas corporation, Leading Life Senior Living, Inc., filed for Chapter 11 bankruptcy in the same federal court on Nov. 18, seeking to sell two Oklahoma senior living facilities after defaulting on bonds sold to fund their purchase.

Defaults on $30.275 million of tax-exempt and taxable revenue bonds issued through the Oklahoma Development Finance Authority in 2017 began in 2020. As of last month, outstanding bond principal was $29.68 million and accrued and unpaid interest totaled nearly $3.25 million. Leading Life is working with the largest known holder of its Series A bonds to accomplish an asset sale.

In the Western District of Texas Bankruptcy Court, Glen Hope Harbor, Inc. filed a Chapter 7 liquidation case in March after closing its properties in February. The nonprofit, which sold $38.12 million of mostly tax-exempt revenue bonds in 2015 through New Hope Cultural Education Facilities Corporation to acquire 144 assisted living and memory care units in the Houston and San Antonio areas, began drawing on the debt service reserve fund in 2019 and defaulting in 2020.

Following the sale of the properties by the Chapter 7 trustee, Wilmington Trust, the bond trustee, announced last week $11.8 million of the sale proceeds will be distributed to bondholders this week.

The New Hope corporation, a nonprofit entity created by the New Hope, Texas, town council, was the conduit issuer for other defaulted senior living bonds, including $230.7 million issued in 2016 and $52.6 million sold in 2017.

Recent defaults in other parts of the Southwest region include nonprofit Kansas Masonic Home, which sold $32.78 million of mostly tax-exempt bonds through the city of Wichita in 2016. Proceeds from the unrated bonds, which carry maturities out to 2046, refinanced commercial bank loans incurred to expand, remodel, and equip a continuing care retirement community in Wichita, according to the official statement.

A disclosure notice last week from bond trustee UMB Bank said Kansas Masonic Home announced Nov. 18 it planned to close the facility by year end “without advance notice to the trustee” and that it failed to make monthly debt service payments resulting in an event of default.

“The trustee has begun discussions with (Kansas Masonic Home) regarding the announced closure, including the preservation and protection of the collateral securing the bonds,” the notice stated. 

Another default involves $32.8 million of unrated bonds issued in 2014 by the Industrial Development Authority of Peoria, Arizona, for Sierra Winds Life Care Community owned by nonprofit Arizona Retirement Centers, Inc.

Bond trustee UMB Bank disclosed last month that after consulting with bondholders the debt service reserve fund was tapped to make an interest payment, but not a principal payment with both due Nov. 15.

“Holders are thus retaining $1.6 million in the reserve fund for what comes next,” MMA said in a recent report. “Sierra Winds became impaired in early 2019 for a failure to meet its financial covenants, then things got better, then worse during the pandemic, the provider showing just 0.05x debt service coverage over the summer.” 

The bond proceeds refunded $26.86 million of outstanding 1999 debt and funded capital improvements at the community, according to the official statement.