New default for a twice-bankrupt Illinois senior living facility

Holders of restructured bonds of the Clare Oaks senior living community in Illinois are giving the facility some breathing room and funds to support capital needs under a forbearance agreement that staves off any punitive actions allowed after a payment default on $50 million of municipal bond debt.

Clare Oaks’ previous fiscal struggles resulted in two bankruptcy filings, the most recent leading to a bond exchange in 2020, but it struggled as many peers did because of the COVID-19 pandemic, along with the more recent challenges of rising inflation and labor shortages.

Clare Oaks, 30 miles west of Chicago in Bartlett, defaulted on an installment of interest due May 15th, according to a June 2 notice from the bond trustee UMB NA.

A majority of holders agreed to a forbearance that staves off actions allowed by the trustee due to the default.

In exchange, Clare Oaks agreed to make a partial payment of $270,000 and must comply with budgetary terms laid out in the agreement and hire a third-party operational consultant leading to the hiring of a new third-party manager by Aug. 1. The forbearance expires at the end of the year.

As part of the forbearance, Clare Oaks requested funding help.

The asset managers for funds holding a majority of the bonds, Lapis Advisers, LP and Amundi Pioneer Asset Management, Inc., agreed to provide a $700,000 loan “to cover critical working capital needs as set forth in the budget,” according to the notice. The trustee was expected to close on the loan last Friday.

A $20 million series in the restructured bonds that mature in 2052 has recently traded at 35 cents on the dollar, according to trade data on the Municipal Securities Rulemaking Board’s EMMA website. The entrance-fee based continuing care retirement community is located on a 44-acre campus offering independent living units, 33 assisted living units, and skilled nursing units.

Clare Oaks first landed in federal bankruptcy court in 2011. The U.S. Bankruptcy Court for the Northern District of Illinois, Eastern Division, approved the plan submitted by the bond trustee and letter of credit bank for Clare Oaks in late 2012. It restructured a $116 million 2006 issue that had sold through the Illinois Finance Authority.

The original issue of fixed- and floating-rate securities financed the construction of the facility and repayment of loans to its sponsoring organization the Sisters of St. Joseph of the Third Order of St. Francis Inc.

Under the 2012 restructuring plan, Clare Oaks issued $90 million of bonds with a portion being exchanged for defaulted bonds and a piece also purchased by existing bondholders and Sovereign Bank, the letter of credit provider. Proceeds covered various debtor financing costs, the financing of capital expenditures, funded various reserves and lease payments, and paid for restructuring costs.

The objective was to lower annual debt service to an affordable level based on present and anticipated operations.

Clare Oaks opened in 2007 and struggled, like many CCRCs across the country, due to the real estate market downturn that hurt seniors’ ability to sell their homes and move into the facility.

Failing to fill its units quickly enough, Clare Oaks depleted its operating and debt service reserves, missed bond payments, and filed a voluntary bankruptcy petition in December 2011. It continued operations under debtor-in-possession financing.

Troubles persisted and after failed discussion with bondholders, Clare Oaks again landed in Chapter 11 bankruptcy in June 2019. The facility said it had “initiated attempts to discuss solutions prior to filing for bankruptcy, but bondholders chose not to restructure the agreement. This unwillingness to explore options led to Clare Oaks declaring bankruptcy in 2019,” the facility said in a statement at the time.

The court initially received competing reorganization plans because Clare Oaks’ main creditors committee was at odds with the majority bondholder group.

“Following extensive negotiations, the plan sponsors, committee, and debtor reached a global settlement on the terms of a consensual restructuring plan, which was set forth in the Plan of Reorganization confirmed by U.S. Bankruptcy Court on Tuesday, September 29, 2020,” the Illinois Finance Authority said in its resolution to authorize the restructuring bonds.

The restructuring cut Clare Oaks’ debt by $40.6 million to $51 million “thereby significantly deleveraging the project,” IFA documents. said. The new bonds sold in seven series and also provided $5 million in new money for capital improvements and deferred maintenance in one series purchased by Lapis and Amundi. The funds also financed the conversion of some skilled united to assisted living.

“The goal of this rigorous process was to reduce the burden of unrealistic long-term debt, an all-too-common phenomenon among CCRCs opened earlier this century, and to infuse fresh capital for a series of improvements,” Clare Oaks’ new board chair, Julie Boggess, said in a statement at the time.

In its latest financial filings, Clare Oaks reported occupancy levels of the independent living units at 64% last August while assisted living was at 83% and skilled nursing at 88%.

“The COVID?19 pandemic has significantly disrupted operations, marketing and sales of the community. The extent to which the pandemic will impact the community’s operations and finances will depend on future developments which are highly uncertain and cannot be predicted or estimated at this time,” it reported. “We have properly disclosed this uncertainty and are committed to reporting upon adverse effects of the pandemic as more is known.”

Clare Oaks is among six defaulters in the senior living project space that have defaulted so far this year. The sector is tied for the most defaults with industrial revenue bond projects at six each, according to Municipal Market Analytics’ weekly default trends report from last week. The year-to-date count of total monetary defaults for all sectors as of last week was 23 with $1.25 billion of outstanding debt impacts.

While the pandemic’s lingering toll weighs on the senior living sector, labor inflation also has strained operating costs, Fitch Ratings said in a report last week.

Early 2023 labor data for life plan communities and skilled nursing facilities shows that labor wage inflation remains well above recent historical averages after peaking in early 2022 with hourly earnings growth of 5.7% and 4.6% at LPCs and SNFs in 2023 more than double the 2.1% and 1.9% averages from 2010-2019, respectively.

“Persistently high wage inflation remains a major credit risk for LPCs and SNFs given the very tight labor environment,” Fitch said. “High fee increases at LPCs will help alleviate wage pressures, but Fitch does not believe this practice is sustainable over the longer term to maintain profit margins.”