The fate of $52 million of municipal debt is at stake as the Henry Ford Village, Inc. continuing care retirement community in Dearborn, Michigan, makes its way through a Chapter 11 restructuring triggered by mounting debts, the COVID-19 pandemic, and an inability to tap the market for near-term relief.
“We have been in ongoing discussions about the need for a financial reorganization due to our stretched financial situation, industry-wide challenges and impact from the COVID-19 pandemic,” the village said in a statement after the Oct. 28 Chapter 11 filing.
The village, which offers independent, assisted living and skilled nursing units, sold $42 million of unrated bonds in 2008 and $14 million in 2017 through the Dearborn Economic Development Corporation.
Holders of bonds sold on behalf of the 1,000-bed facility will see their first payment default — with the agreement of bondholders holding a majority of outstanding principal — this month as HFV and bondholders negotiate an agreement on the facility’s use of cash collateral to stay afloat. A bankruptcy court hearing on the subject is set for Nov. 23. Unrestricted cash assets are pledged to bondholders.
An interim order “allows the debtor to use funds on deposit in certain operating accounts for the operating expenses of the facility” with bondholders afforded “a lien against substantially all of its post-petition assets, subject (under certain circumstances) to a carve out for the payment of certain budgeted professional fees,” bond trustee UMB Bank NA reported in a Nov. 5 filing.
“The terms of the interim order also require the debtor to hire an investment banker acceptable to the Trustee upon terms and conditions acceptable to the trustee” and “as part of the bankruptcy case and through the assistance of the investment banker, the debtor will explore strategic alternatives including a possible sale of the facility,” the notice reads.
The pandemic has weighed heavily on the balance sheet and reputations of senior living facilities as they have struggled to cope with rising caseloads and deaths, skyrocketing personal protective equipment and staffing costs, and requests for entrance fee refunds as seniors delay moves.
Signs of fiscal stress became clear in the spring as HFV halted monthly transfers to UMB and debt service reserves were drawn to fully cover the May 15 $1.9 million debt service payment. Last month the trustee accelerated repayment of the bonds due to defaults under the loan agreements. UMB notified the village that defaults had occurred because of its inability to make good on monthly payments and refunds owed to former residents.
Henry Ford Village headed into the bankruptcy with strains on its balance sheet stemming from the entrance fee model adopted by prior management companies. Fees ranged from $27,500 to $356,000 as of January and a portion is refundable.
The pandemic hurt occupancy levels, the village struggled to attract new residents, and the facility was unable to complete a debt refinancing designed to provide relief. Pressures reached a boiling point last month when the CCRC faced a court order to honor an $800,000 legal settlement over entrance fees stemming from a 2014 class action lawsuit.
UMB was informed by the village in September of the impending settlement payment and objected to it as “an unauthorized use of the collateral securing the bonds, and as a threat to the borrower’s financial stability,” the trustee said in a notice.
HFV, which is located on the site where Ford Motor Co. founder Henry Ford was born, asked a state court judge to delay the payment but the court on Oct. 22 ordered the village to make it by Oct. 29, leading to the Chapter 11 filing.
“Given the extent of the debtor’s entrance fee refund obligations (in excess of $30 million) and a court order settling a class action lawsuit…which obligated the debtor to use approximately 20% of its existing liquidity to pay the plaintiff class and its counsel, the debtor was in danger of being unable to continue its operations absent the Chapter 11 filing,” UMB told bondholders in an October notice.
The inability to move forward with a refinancing also hurt. “The 2020 refinancing — like so many other things — was upended by the COVID-19 pandemic and not completed. Hence, in addition to its endemic challenges, COVID-19 became an additional and significant contributing factor compromising HFV’s financial viability,” the facility’s chief restructuring officer, Chad Shandler, said in bankruptcy documents.
Shandler is a senior managing director for corporate finance and restructuring at FTI Consulting, Inc. FTI was hired in August by the village as financial advisor.
HFV is seeking to achieve “more sustainable capital structure” and to find a strategic or financial acquirer or sponsor to put the debtor on a “solid financial footing” and has “sufficient cash collateral to continue operations during a potential sale process over the next thirteen weeks, but will likely require additional liquidity to complete this case,” Shandler wrote.
UMB believes the Chapter 11 filing will provide transparency on HPV operations and a mechanism for a process to insure that the facility continues to operate as it addresses its liquidity problems. “As a result, and with the agreement of the holders of a majority in principal amount of the bonds, the principal and interest payment due on the Bonds on November 15, 2020, will NOT be paid at this time.”
The bonds have long been on Municipal Market Analytics’ radar.
The facility was originally developed by Erickson Retirement Communities. HFV purchased it in 1998 but Erickson continued to operate it. The company filed for bankruptcy in 2009. Redwood Capital Investments acquired Erickson and continued to operate HFV until 2010 when the ties were severed. Des Moines, Iowa-based Life Care Services is the current management company, although it’s also a creditor because it is owed fees.
The Erickson bankruptcy situation was resolved but more general operating difficulties with covenant breaches and a reserve draw occurred a few years later, MMA said. The facility restructured a portion of the 2008s with that 2017 issue which held off renewed liquidity problems until late 2019, according to MMA.
The offering statements note that bondholder claims may be superior to other creditors but bankruptcy “may affect enforceability.” Under the bond documents, the bond trustee was granted a first priority lien and security interest on substantially all of debtor’s assets with the exception of those that fall under “restricted.” The bonds have a final maturity in 2044.
The filing automatically stays all proceedings against the Henry Ford Village, including the class action and payment obligations. The case — No. 20-51066 — was filed in the Eastern District of Michigan, Southern Division, and Judge Mark A. Randon is presiding. A hearing is slated for later this month and a status conference for Dec. 14.