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Tuesday, April 16, 2013 2:45 – 4:00 p.m. Moderator: Donna Murr, Executive Director Washington Health Care Facilities Authority Call the Medic: Anatomy.

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Presentation on theme: "Tuesday, April 16, 2013 2:45 – 4:00 p.m. Moderator: Donna Murr, Executive Director Washington Health Care Facilities Authority Call the Medic: Anatomy."— Presentation transcript:

1 Tuesday, April 16, :45 – 4:00 p.m. Moderator: Donna Murr, Executive Director Washington Health Care Facilities Authority Call the Medic: Anatomy of a Bankruptcy

2 2 Dan Gottlieb, Partner Gottlieb Fisher PLLC 1501 Fourth Ave, Suite 2150 Seattle, WA Pam Lenane, Vice President Illinois Finance Authority 180 N. Stetson Ave, Suite 2555 Chicago, IL Rich Scanlon, Managing Director Ziegler 2048 Carolina Ave., NE St. Petersburg, FL James E. Van Horn, Partner McGuireWoods LLP 7 Saint Paul St., Suite 1000 Baltimore, MD

3 Outline Introduction:Strategies to Keep a Troubled Credit From Getting WORSE Overview:Bankruptcy Panel Discussion:Clare Oaks: A Bankruptcy Case Study Q & A 3

4 4 Rich Scanlon Managing Director, Senior Living Finance Ziegler

5 ABOUT ZIEGLER…… Ziegler is the nation’s oldest and largest investment banking firm focused primarily on healthcare finance – Founded in 1902 with our first bond issue completed in 1928 – Nationwide focus Our services to the non-for-profit healthcare provider are focused on the following areas of expertise: – Investment Banking – Capital Markets – Wealth Management – Capital Management Ziegler’s commitment to senior living is unmatched – Since 1990, Ziegler has underwritten 705 senior living issues for a total of $22.2Billion – Transaction size has ranged from $1.6 million to $229 million Since 1990 we have underwritten senior living bond issues through nearly 250 issuers – with $2.9 billion issued through IL Finance Authority/IL HFA 5

6 TOTAL ZIEGLER 2007 $3.1 Billion (41.2% of NFP Senior Living) (0.7% of Municipal) 2008 $650.3 Million (26% of NFP Senior Living) (0.2% of Municipal) 2009 $852.0 Million (47.3% of NFP Senior Living) (0.7% of Municipal) 2010 $1.5 Billion (61% of NFP Senior Living) (0.3% of Municipal) 2011 $518.4 Million (50% of NFP Senior Living) (0.2% of Municipal) 2012 $1,480.0 Million (40% of NFP Senior Living) (0.4% of Municipal) TOTAL NFP SENIOR LIVING 2007 $7.4 Billion (1.7% Municipal) 2008 $2.5 Billion (0.7% of Municipal) 2009 $1.8 Billion (0.4% of Municipal) 2010 $2.6 Billion (0.6% of Municipal) 2011 $1.1 Billion (0.4% of Municipal) 2012 $3.7 Billion (1.0% of Municipal) TOTAL HEALTHCARE 2007 $49.8 Billion (11.6% of Municipal) 2008 $61.2 Billion (15.7% of Municipal) 2009 $44.1 Billion (11.0% of Municipal) 2010 $28.7 Billion (6.6% of Municipal) 2011 $25.6 Billion (8.7% of Municipal) 2012 $29.2 Billion (8.0% of Municipal) TOTAL MUNICIPAL 2007 $429.9 Billion 2008 $391.9 Billion 2009 $409.1 Billion 2010 $433.2 Billion 2011 $294.7 Billion 2012 $366.8 Billion SOURCE: Totals from Thomson Securities Data and The Bond Buyer, as of 12/31/12 6 Capital Markets Municipal Volume Breakdown ( )

7 7 Source: 2010 US Census Data As of 2013, the oldest baby boomer is about 67 years old Market Opportunity

8 Senior Living Continuum Trends The Senior Living Continuum: Expanded 8 Want DrivenNeed Driven Hospital Long-Term Care Preventative Continuing Care Retirement Community Senior Center Services Geriatric Assessment/ Care Coordinator & Case Management Senior Health & Wellness Center Catered Living Assisted Living Respite Care Intermediate Nursing Skilled Memory Support Nursing Rehab Subacute Acute Transitional Medicare Hospice Skilled Nursing Home Health Care Memory Support Assisted Living Adult Day Services Independent Living Case Management *Community Based Services Wellness Program *Transportation; Information/Referral; Counseling; Meals-on-Wheels; Integrated Day Care; Homemaker/Chore/Housekeeping; and Emergency Response System AACs Adapted from Greystone Communities’ Continuum of Care Chart

9 Today’s retirement options A Look at Supply Source: Ziegler National CCRC Listing & Profile, NIC MAP® Data and Analysis Service, & the U.S. Census Bureau CCRCs 1, ,000 Units FP: 20% NP: 80% Private Pay/ Third Party/ LTC IL 3, ,500 Units FP: 80% NP: 20% Private Pay AL 6, ,500 Units FP: 90% NP: 10% Private Pay LTC SNF 15,700 1,705,800 Beds FP: 68.8% NP: 25.5% Gov: 5.6% Medicare/ Medicaid/ LTC/Private Pay # of Properties # Served ESTIMATES Ownership/Sponsorship Breakdown Payment Types 9

10 VOLUME BY PURPOSE Trends for refinancings follow borrowing cost movement (ex. 50% of volume in 2007) Average new money per year for last five years was approximately $1.8 billion 2011: nearly $1.0 billion of new money SOURCE: Thomson Financial Securities Data, as of 1/2/13; and Ziegler Investment Banking Not-For-Profit Senior Living Financings 10

11 BOND DISTRIBUTION CHANNELS ZIEGLER’S SENIOR LIVING VOLUME Par Amount of Senior Living Bonds SOURCE: Ziegler Investment Banking, as of 12/31/12 Note: Institutional vs. Retail Bonds and decline of bank letter of credit enhanced Variable rate demand bonds 11

12 Ziegler’s Senior Living Default Study Scope Includes unenhanced, fixed-rate tax-exempt public municipal bond issues for CCRCs for both issuance and default CCRC is defined as ILUs, plus either ALUs or NCBs Default is defined as a monetary default on the bonds, bankruptcy filing, or debt reorganization Tapping DSRF is not default trigger Par amount defaulted is the fixed-rate par amount at issuance, not amount outstanding at time of default Recovery rate is based on fixed-rate outstanding at time of default Some inherent limitations to the Default Study do exist 12

13 Ziegler’s Senior Living Default Study Perspective vs. Other Sectors 13

14 Ziegler’s Senior Living Default Study Months to Default from Issuance Date 14 Most issues that default will default within 3 to 8 years of issuance Average time to default is 5.9 years/median is 5.1 years

15 Ziegler’s Senior Living Default Study Year in Which Default Occurred 15

16 Ziegler’s Senior Living Default Study Cumulative Annual Trend Analysis 16 With the onset of the housing crisis – Number of defaults recorded annually has remained relatively constant – Average par amount of defaults recorded in 2009 jumped to $72.4mm reflecting failure of large, start-up projects Far greater number of defaults recorded in 2003 (shown on prior page) for an annual average of $10.3mm resulted from difficult operating conditions (expense increases, investment yield declines)

17 Calculation methodology for Recovery Adjusted Par Default Rate is very conservative Recovery Adjusted Par Default Rate has increased as Average Recovery Rates have fallen from 77 cents to 62 cents – very weak recovery rates for three Erickson projects – affects a relatively large amount of debt Ziegler’s Senior Living Default Study Recovery Rate Analysis (I)Assumes actual recovery value for “resolved” defaults on “0” recovery for any defaults where the status is still “pending” (II) Assumes actual recovery value for “resolved” defaults and “pending” will be recovered at the average recovery rate for all of the prior known outcomes. 17

18 Challenged Credit Pathways 18 Borrower Violates Covenants/ Default NFP White Knight? Membership Assumption/ Affiliation Asset Sale Purchase Other At or Above Par Restructure FP Buyer? At or Above Par Receivership Asset Sale Purchase Restructure Forbearance Ch. 11 Filing Voluntary Restructure Asset Sale Closure No Yes No Yes

19 Challenged Credit considerations Forbearance, Restructure, Affiliation or Full Disposition Potential considerations include: – Likely Recovery – Financial impact to project of approach – Certainty of Recovery – Fully Exiting Credit – Difficulty of Predicting CCRC Valuation – Remaining Cash and Need for New Equity – Benefits of Competitive Process – Ability to Assume Tax-Exempt Debt – Time for NFPs to Evaluate Affiliation without Competitive Pressures – Difference between Affiliation and Disposition? – Debtor Resistance – Conflicts Among Debtors – Curable Operating Inefficiencies – Possibility for Credit to Deteriorate Further – Professional Fees 19

20 TROUBLED CCRC: Strategic Options Option 1- determine if affiliation offers best strategic alternative and affiliate with an existing state or regional system Option 2- restructure the outstanding bonds such that current operations can support the revised debt service requirements Option 3 -Construct additional IL/AL/MS or health care units to increase revenues available for debt service Option 4 - file for protection under Chapter 11 of the U.S. Bankruptcy Code 20

21 Strategic Option 1 – Affiliation Growth of 100 Largest NFP Senior Living Providers 21 Partial histories used if complete data was unavailable Source: 2012 LeadingAge Ziegler 100 Publication (data as of 12/31/11) Growth of LZ 100 Providers has slowed post-2008

22 Source: 2012 LeadingAge Ziegler 100 Publication (data as of 12/31/11) 5 Year Increments 2011 Only 2 Years Strategic Option 1 - Affiliation Number of Communities Added by Growth Type 22

23 The “inevitable” (restructuring) had been delayed several years due to foundation debt service support Strategic Option 2 – Bond Restructure Example CCRC: Historical and Forecast DSCR 23

24 For informational purposes only Strategic Option 2 – Debt Restructure Debt Capacity – Par Value and Coupon Example CCRC debt capacity is significantly below the outstanding bond par amount given RADS In order to support the full par amount interest rates would have to be cut substantially 24

25 Strategic Option 2 – Debt Restructure Restructure Example CCRC Bonds Goal is to achieve 1.30x DSCR – manipulate 3 variables Higher percentage of retail holdings leads to greater complexity/uncertainty in approval process Secondary market trades for Example CCRC $0.50 CONCERN – eats up limited liquidity of a distressed CCRC For informational purposes only 25

26 For informational purposes only Strategic Option 3 – Repositioning Reconfigure Example CCRC campus Goal is to achieve 1.30x DSCR (30-yr 6.0%) May have to be done in conjunction with Strategic Option 2 CCRC primary market areas are very “dynamic” and consumer needs/desires evolve rapidly – Management, management, management….. – If a CCRC “falls behind” it is far more difficult to “catch up” 26

27 Needs to be utilized when there is a high percentage of retail holders in order to get “plan” approved Can “stigmatize” a CCRC in the primary market area for years – significant competitive disadvantage Professional fees and the process consumes substantial borrower management time, liquidity and, typically, leads to much lower recovery values Strategic Option 4 - Bankruptcy 27

28 Keys to Maximizing Value for a Distressed NFP CCRC Continued flow of information and spirit of cooperation No “outside agendas” other than undertaking efforts to maximize the value to stakeholders – Residents – Employees – Bondholders “For profits” have become very aggressive participants Messy, contentious Chapter 11’s “stain” the entire industry – Creates marketing issues in the CCRC’s primary market area – Lower recovery rates drive up future borrowing costs 28

29 29 James E. Van Horn Partner McGuireWoods LLP

30 Overview of U.S. Bankruptcy Code Chapters 30 Bankruptcy Code Chapter Who May Be a Debtor Primary Purpose Chapter 7 Individuals or Businesses Liquidation Chapter 9MunicipalitiesReorganization Chapter 11Individuals or Businesses Reorganization Chapter 12Family FarmersReorganization Chapter 13IndividualsReorganization

31 Chapter 7 (Liquidation) Key Attributes: – Provides framework for the creation of an estate containing the debtor’s non-exempt assets, the orderly liquidation of those assets, and the distribution of liquidation proceeds to the debtor’s creditors in order of statutory priorities – Upon the debtor’s filing, the U.S. Trustee appoints Chapter 7 trustee, who is responsible for administering the liquidation of the debtor’s estate – Business debtor ceases to operate (unless trustee obtains temporary authority to operate business), management no longer has control over debtor’s assets, and going concern value is destroyed 31

32 Chapter 11 (Reorganization) Key Attributes: – Available to individuals or businesses, but most often used by businesses – Typically used for reorganization, but can also be used for liquidation – Debtor in possession or Chapter 11 trustee If debtor in possession, the debtor’s management continues to operate the business in the ordinary course If Chapter 11 trustee, the debtor’s management is replaced by a trustee who runs the business Goal is a plan that sets forth all of the contractual terms and conditions of the debtor’s reorganization (or liquidation) 32

33 Property of the Estate Definition : The commencement of a bankruptcy case automatically creates an estate that broadly includes all of the legal and equitable interests of the debtor in property The case is commenced by debtor’s filing of a petition under one of the applicable chapters of the Bankruptcy Code (or by an involuntary case filed by qualifying creditors against the debtor) 33

34 Property of the Estate (cont’d) Ordinary Course vs. Non-ordinary Course Transactions – Debtor in possession or trustee has the ability to use, sell, and/or lease any estate property in the ordinary course of business – Any use, sale or lease of estate property that is outside of the ordinary course of business must receive prior approval from the bankruptcy court 34

35 Types of Claims: Post-petition Administrative Claims: Held by creditors who have provided goods or rendered services to the debtor on a post-petition basis – Any actual, necessary costs and expenses of preserving the estate (including professionals) Distribution Priority: Administrative claims are paid in full before any distribution is paid on pre-petition claims 35

36 Types of Claims: Pre-petition Secured Claims: Held by creditors who have a consensual, judicial or statutory lien against the assets of the debtor or hold a claim that is subject to setoff Unsecured Priority Claims: Special class of unsecured claims entitled to payment from the estate after secured and administrative claims, but before unsecured non-priority claims Unsecured Non-Priority Claims: Held by creditors who have no lien or other security interest in the debtor’s property 36

37 The Automatic Stay Key Attributes – A fundamental protection that shields the property of the Debtor’s bankruptcy estate from creditors – The Debtor is given a breathing spell – The stay is effective automatically upon filing – Very broadly applied to proscribe virtually any collection activity against the debtor or the debtor’s property on a pre-petition claim 37

38 The Automatic Stay (cont’d) Relevant Provisions – Include (but are not limited to) the following: Any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the bankruptcy case; and Any act to exercise control over property of the estate The setoff of any debt owing to the debtor that arose before the commencement of the bankruptcy case. 38

39 The Automatic Stay (cont’d) Violation of the Automatic Stay – Generally, actions taken in violation of the automatic stay are held void or voidable and may result in monetary sanctions – Creditor notice or intent is not an element of an automatic stay violation, but creditor’s lack of notice of bankruptcy case may constitute a defense to avoid sanctions if creditor immediately refrains from, and reverses the effect of, prohibited actions 39

40 Asset Sales Under Section 363(b) of the Bankruptcy Code, the trustee, after notice and a hearing, may use, sell, or lease, other than in the ordinary course of business, property of the estate. The court can authorize the trustee to sell estate property “free and clear” of any interest in such property of an entity other than the estate, only if: – applicable non-bankruptcy law permits sale of such property free and clear of such interest; – such entity consents; – such interest is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; – such interest is in bona fide dispute; or – such entity could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest. – However, at any time, on request of an entity that has an interest in property used, sold, or leased, or proposed to be used, sold, or leased, by the trustee, the court, with or without a hearing, shall prohibit or condition such use, sale or lease as is necessary to provide adequate protection of such interest. 40

41 Reorganization – The Chapter 11 Plan Disclosure Statement and Plan Overview – Plan of Reorganization Reorganization is the ultimate goal of most businesses seeking protection under Chapter 11 of the Bankruptcy Code Reorganization is achieved by a debtor emerging from bankruptcy through confirming and consummating a plan of reorganization – Disclosure Statement When filed by its proponent, the plan of reorganization must be accompanied by a disclosure statement The disclosure statement is the means by which the plan proponent solicits votes for its plan of reorganization 41

42 Reorganization – The Chapter 11 Plan (cont’d) Plan Filing Exclusivity Period – 120-day period cannot be extended beyond 18 months after the petition date Plan Solicitation Exclusivity Period – 180-day period cannot be extended beyond 20 months after the petition date 42

43 Reorganization – The Chapter 11 Plan (cont’d) Disclosure Statement Approval Process – Court approval required Before a plan of reorganization can be solicited to creditors for their consideration, the bankruptcy court must approve the adequacy of the information contained in the disclosure statement that will accompany the plan Notice – The disclosure statement must be served on all creditors at least 25 days before the deadline established for parties to object to the adequacy of information set forth in the disclosure statement; and the scheduled bankruptcy court hearing on the consideration of the disclosure statement. 43

44 Reorganization – The Chapter 11 Plan (cont’d) Key Inquiry: Adequacy of Information – To approve the disclosure statement, the bankruptcy court must determine that the disclosure statement contains “adequate information” “Adequate information” means “information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor's books and records, that would enable a hypothetical reasonable investor typical of holders of claims or interests of the relevant class to make an informed judgment about the plan, but adequate information need not include such information about any other possible or proposed plan.” 44

45 Reorganization – The Chapter 11 Plan (cont’d) Objections to Disclosure Statement – Any party in interest can object to the adequacy of the information provided in the disclosure statement Objections rarely prevent court approval, but rather lead to revisions and/or further disclosure Misplaced Objections – Often objections raised to the disclosure statement are really objections to the confirmability of the plan – Issues that would bar confirmation of the plan are primarily heard at the hearing on confirmation of the plan However, in rare instances, when a plan will clearly violate the Bankruptcy Code, it may be deemed patently unconfirmable by the court at the hearing on the disclosure statement 45

46 Reorganization – The Chapter 11 Plan (cont’d) After Disclosure Statement Approval – Once the adequacy of information in the disclosure statement is approved by the court, the plan proponent will send out the following materials to all creditors entitled to vote on the proposed plan Approved Disclosure Statement Proposed Plan of Reorganization Voting Ballot and Instructions Notice of Deadline to Submit Ballots and Plan Objections 46

47 Reorganization – The Chapter 11 Plan (cont’d) Basic Elements – Section 1123 of the Bankruptcy Code sets forth the essential functions of a Chapter 11 plan. Some of these include: classifying claims and interests; determining how classes will be treated; specifying which classes are unimpaired; providing adequate means of funding and consummating a plan; and assuming or rejecting executory contracts 47

48 Reorganization – The Chapter 11 Plan (cont’d) Purpose – Proponent must classify all creditors and equity interest holders into classes in order to facilitate voting upon and receiving distributions under the plan Importance – Classification alters creditors' positions relative to one another for voting and, in some instances, for distribution purposes – The strategic classification of claims may allow the plan proponent to wield great power in a Chapter 11 case and, as a result, is often a contested matter in bankruptcy 48

49 Reorganization – The Chapter 11 Plan (cont’d) Rules of the Road – All claims or interests in a given class must be substantially similar to one another For example, a secured creditor cannot be classified with an unsecured creditor or an interest holder – Not all substantially similar claims or interests must be placed in same class if reasonable justification for separate classes exist – Gerrymandering of classes forbidden – Convenience class claims May be created for claims at or below a specific dollar amount as reasonable and necessary for administrative convenience 49

50 Reorganization – The Chapter 11 Plan (cont’d) Impaired vs. Unimpaired Claims – Impaired claim: The proposed plan of reorganization seeks to alter the legal, equitable, or contractual rights of the claimholder in some way – Unimpaired claim: The plan does not impact the rights that the claimholder has under applicable non-bankruptcy law Voting – Impaired claimholders who would receive a distribution under the plan are entitled to vote on the plan – Impaired claimholders who would not receive a distribution under the plan are deemed to have rejected the plan – Unimpaired claimholders do not vote and are deemed to have accepted the plan 50

51 Reorganization – The Chapter 11 Plan (cont’d) 51 Temporary Allowance of Claim for Voting Purposes Statutory Test for Acceptance – A class has accepted the plan when at least two- thirds in monetary claim amount and one-half in number have voted to accept the plan – At least one impaired class must vote to accept the plan for it to be confirmed

52 Reorganization – The Chapter 11 Plan (cont’d) Other Major Requirements – Good faith requirement Plan must be proposed in good faith Plan proponent cannot abuse the judicial process in order to frustrate the legitimate expectations of creditors or principally to delay recovery by creditors – Same treatment for claims within a class Claimholders in the same class cannot receive different treatment, unless a particular claimholder agrees to less favorable treatment 52

53 Reorganization – The Chapter 11 Plan (cont’d) 53 Other Major Requirements – Best interests of creditors test Each impaired claimholder has either – Accepted the plan; or – Will receive as much or more under the plan as that claimholder would receive in a Chapter 7 liquidation of the debtor’s estate. – Feasibility Plan is likely to be consummated; and Plan is not likely to be followed by a further reorganization or liquidation by the newly reorganized debtor, except in those cases where the plan proposes liquidation.

54 Reorganization – The Chapter 11 Plan (cont’d) 54 Issue – To confirm a plan, each class of claimants must either have accepted the plan or be deemed to have accepted the plan by virtue of being unimpaired Function – If the plan has not been accepted by all of the impaired classes, it may be possible for the plan proponent to “cram down” the classes that have rejected the plan Elements – In order for the plan proponent to “cram down” the classes that have rejected the plan, the plan must not discriminate unfairly; and must be “fair and equitable” to those classes that are crammed down.

55 Reorganization – The Chapter 11 Plan (cont’d) 55 Unfair Discrimination – Not defined in Bankruptcy Code – Key factors What effects the discrimination has on the class; and What prompted the discrimination? – Fair discrimination: Giving classes equal distributions, but paying them on different terms – Unfair discrimination: Treating similarly situated creditors differently by paying a higher recovery to a class that the proponent favors

56 Reorganization – The Chapter 11 Plan (cont’d) 56 Fair and Equitable Treatment – Absolute Priority Rule (applies to all classes) Requires that a rejecting class of claimants receive property equal to the amount of their allowed claim, even if paid over time, or no class of claims junior to the class being crammed down shall receive any property on account of their junior claims

57 Reorganization – The Chapter 11 Plan (cont’d) Fair and Equitable Treatment (cont’d) – Additional class specific requirements Secured claimholders: Usually, creditor retains its lien in the property with principal paid over time with interest General unsecured claimholders: (1) payment in full over time or (2) partial payment, but absolute priority rule still applies 57

58 Reorganization – The Chapter 11 Plan (cont’d) 58 Fair and Equitable Treatment (cont’d) – Additional class specific requirements Interest holders: Often eliminated during bankruptcy because insolvent company has no equity value. But, if equity has value, it can be crammed down if it receives or retains the greater of – the present day value of its interest; or – the contractual redemption or liquidation amount of its interest. NOTE: In certain circumstances, “underwater” equity can retain its ownership interests in the debtor by contributing new value to the debtor as part of the reorganization plan (the New Value Exception to the Absolute Priority Rule)

59 59 Pam Lenane Vice President Illinois Finance Authority Dan Gottlieb Partner Gottlieb Fisher PLLC James E. Van Horn Partner McGuireWoods LLP

60 Clare Oaks: A Bankruptcy Case Study Background Details About Clare Oaks 501(c)(3), sponsored institution, Sisters of St. Joseph of the Third Order of St. Francis (“SSJ-TOSF”) located in Chicago suburb, land owned by SSJ-TOSF and leased to 501(c)(3) Provides a comprehensive continuum of care to its residents and consists of: – 164 independent living units – 17 assisted living units – 16 specialty care (memory support) units – 120 skilled nursing beds 60

61 Clare Oaks: A Bankruptcy Case Study Background 2006 Transaction IFA issued $112,725,000 of revenue bonds to finance a portion of the costs of building Clare Oaks. The bonds were underwritten by B.C. Ziegler and Company. Series 2006A Bonds – Fixed Rate Revenue Bonds ($5,000 Denominations) Series 2006B-1 Bonds – EXTRAS ($5,000 Denominations) Series 2006B-2 Bonds – EXTRAS ($5,000 Denominations) Series 2006C Bonds – Variable Rate Revenue Bonds ($100,000 Denominations) backed by Sovereign Bank letter of credit Series 2006D Bonds – Variable Rate Revenue Bonds ($100,000 Denominations) backed by Sovereign Bank letter of credit 61

62 Clare Oaks: A Bankruptcy Case Study Background Default on obligations relating to the Series 2006 Bonds Senior housing market adversely affected by housing market crisis, economic recession, weakened credit environment. Prospective residents have difficulty selling homes, declines in home equity value, declines in investment portfolio values Clare Oaks opened in 2007 and was affected by these conditions Experienced a slower than projected fill up, which resulted in reduced revenue and caused Clare Oaks to default under the various Bond Documents 62

63 Clare Oaks: A Bankruptcy Case Study Background Default on obligations relating to the Series 2006 Bonds (cont’d) Based upon the events of default, the Master Trustee and Sovereign Bank had the right to commence various rights and remedies against Clare Oaks Clare Oaks requested that the Master Trustee and Sovereign Bank temporarily standstill and otherwise forebear from exercising such rights and remedies In November 2011, the parties agreed to enter into a temporary standstill agreement through December

64 Clare Oaks: A Bankruptcy Case Study The Bankruptcy The Filing Notwithstanding the standstill agreement, on December 5, 2011, Clare Oaks filed a voluntary petition for relief under chapter 11 of title II of the Bankruptcy Code Clare Oaks continued to operate the community as a debtor in possession (DIP) during the Chapter 11 case 64

65 Clare Oaks: A Bankruptcy Case Study The Bankruptcy The Potential Sale Pursued a sale of substantially all assets – obligated to satisfy certain sale milestones under its DIP loan and the order of the Bankruptcy Court permitting Clare Oaks to use cash collateral Clare Oaks engaged B.C. Ziegler and Company to conduct a sale process with these sale milestones Solicitation process conducted over a period of several months, Clare Oaks announced a “stalking horse” asset purchase agreement with a for-profit buyer for an aggregate purchase price of approximately $16 million 65

66 Clare Oaks: A Bankruptcy Case Study The Bankruptcy The Potential Sale (cont’d) A stalking horse offer is an attempt by the debtor to test the market in advance of an auction, the intent is to maximize the value of its assets as part of or before a court auction After payment of the DIP loan and transaction costs, the proposed sale would have yielded a return to secured creditors of approximately $10 million Given this anticipated low recovery to creditors under the proposed sale, the Master Trustee and Sovereign Bank objected to Clare Oaks sale procedures. 66

67 Clare Oaks: A Bankruptcy Case Study The Bankruptcy The Potential Bond Restructuring Clare Oaks engaged in negotiations regarding a bond restructuring with an informal steering committee of bondholders and Sovereign Bank The restructuring would be accomplished pursuant to a plan of reorganization, which would be confirmed by the Bankruptcy Court Under the plan, up to $14 million of tax-exempt and taxable bonds would be issued to pay certain costs of emerging from bankruptcy protection. In addition, the outstanding Series 2006 Bonds would be exchanged for new bonds. Upon the emergence from bankruptcy, Clare Oaks would no longer be a sponsored institution of the Sisters of St. Joseph of the Third Order of St. Francis 67

68 Clare Oaks: A Bankruptcy Case Study Plan of Reorganization/Bond Restructuring Objective Restructure Clare Oaks debt obligations by reducing its annual debt service to a level that could be sustained by present and anticipated future operations. 68

69 Clare Oaks: A Bankruptcy Case Study Plan of Reorganization/Bond Restructuring The Series 2012A Bonds The Series 2012A Bonds comprised of: – $4,000,000 tax-exempt 2012A-2 (maturity 11/15/2027) – $8,000,000 taxable 2012A-1 (maturity 11/15/2027) – $2,000,000 taxable 2012A-3 (maturity 11/15/2017), all at 7% interest (collectively, the “Series 2012A Bonds”) were issued, with the proceeds being used to refinance the Borrower’s existing DIP facility, finance certain capital expenditures, provide a portion of the funds for certain operating, debt service and lease payment reserve funds, pay certain costs of issuance and financing the acquisition by the Borrower of a fee simple purchase option on the underlying land. 69

70 Clare Oaks: A Bankruptcy Case Study Plan of Reorganization/Bond Restructuring The Series 2012B Bonds Outstanding Series 2006 Bonds were exchanged for approximately $40 million of current interest paying tax- exempt bonds (the “Series 2012B Bonds”) Secured by a second priority lien on the assets of the Reorganized Debtor pari passu with the Series 2012C Bonds but junior to the Series 2012A Bonds until such time as the Series 2012A Bonds are repaid in full 70

71 Clare Oaks: A Bankruptcy Case Study Plan of Reorganization/Bond Restructuring The Series 2012C Bonds Outstanding Series 2006 Bonds were exchanged for approximately $35 million of tax-exempt capital appreciation bonds (the “Series 2012C Bonds”) Capital appreciation bonds don’t pay interest on a current basis but appreciate in value based on a specified accretion rate until final maturity 71

72 Clare Oaks: A Bankruptcy Case Study Plan of Reorganization/Bond Restructuring The Series 2012C Bonds (cont’d) Series 2012C Bonds were issued in three tranches: – The Series 2012C-1 Bonds have an aggregate principal amount of approximately $25 million, compounding semi-annually at a 2% yield through final maturity at 40 years from the Effective Date. – The Series 2012C-2 Bonds have an aggregate principal amount of approximately $5 million, compounding semi-annually at a 2% yield through year 6 from the Effective Date, at which time the payment terms relating to the Series 2012C-2 Bonds will be identical to the payment terms of the Series 2012B Bonds, to the extent certain conditions listed below are satisfied. – The Series 2012C-3 Bonds have an aggregate principal amount of approximately $5 million, compounding semi-annually at a 2% yield through year 11 from the Effective Date, at which time the payment terms relating to the Series 2012C-3 Bonds will be identical to the payment terms of the Series 2012B Bonds, to the extent certain conditions are satisfied. 72

73 Clare Oaks: A Bankruptcy Case Study Plan of Reorganization/Bond Restructuring The Series 2012C Bonds (cont’d) The Series 2012 Supplemental Bond Documents will provide that upon the satisfaction of the following conditions precedent, the terms and conditions of the Series 2012C-2 Bonds and Series 2012C-3 Bonds shall automatically reflect the terms and conditions of the Series 2012B Bonds: 1)certification of the reorganized Clare Oaks demonstrating that, after giving effect to the conversion, the Debt Service Coverage Ratio for the preceding 12 months for which financial statements are available was not less than 1.15; and 2)an Opinion of Bond Counsel to the effect that such conversion will not adversely affect the validity of the Series 2012A Bonds or the Series 2012B Bonds or any exemption from federal income taxation to which such Series 2012A bonds or Series 2012B Bonds would otherwise be entitled 73

74 Clare Oaks: A Bankruptcy Case Study Additional Authority Requirements Feasibility Study – CliftonLarsenAllen prepared a feasibility study reflecting significant financing and operational due diligence on Clare Oaks, as well as supported forecasts relating to the viability of the project – Provided a special certification to the Authority, allowing the Authority to rely on the feasibility study in assessing the creditworthiness of the Series 2012A Bonds 74

75 Clare Oaks: A Bankruptcy Case Study Additional Authority Requirements Additional Board Members – The Authority required that three additional board members with CCRC operational experience be added to replace the board members from the SSJ-TOSF 75

76 Clare Oaks: A Bankruptcy Case Study Additional Authority Requirements Restructuring Agent – Alvarez & Marsal Healthcare Industry Group LLC (A&M) delivered a certificate to the Authority which reaffirmed 1)A&M’s role with respect to the Clare Oaks Plan of Reorganization and 2)the representations contained in certain declarations filed by its Chief Restructuring Officer regarding the Plan of Reorganization and the financial and operational viability of the project 76

77 Clare Oaks: A Bankruptcy Case Study Additional Authority Requirements (cont’d) Indemnification Liquidity Account – In addition to the indemnification provisions of the Loan Agreement benefiting the Authority, the Authority required the establishment of an indemnification liquidity account in the minimum amount of $250,000 for the sole benefit of the Authority, which will remain in place until the later of three years following closing or stable occupancy of the project. – At the option of the Authority, any third-party claims against the Authority arising from this transaction can be defended under the indemnification provisions of the Loan Agreement and have the benefit of the IFA Indemnification Liquidity Account. – Any funds remaining in the account after stabilization will be paid to Clare Oaks or the Creditors 77

78 Clare Oaks: A Bankruptcy Case Study Additional Authority Requirements (cont’d) Alternative Working Capital Account – A $1,000,000 fund was created with a third party escrow agent from the Borrower as a result of savings from the write off and deferral of professional fees. – Clare Oaks may draw funds from the Alternative Working Capital Fund for working capital expenses of the Project, provided the following conditions are met: 1)no funds are available in the Unrestricted Reserve Fund ($1.4 million); 2)no funds are available in the Operating Reserve Fund held by the Trustee ($1.15 million), or the Trustee has failed to fund a requisition of funds from the Operating Reserve Fund; 3)at the time of the draw the Borrower’s Days Cash on Hand (as defined in the 2012 Bond Documents) is less than 50 in Year 1 after Effective Date, 54 in Year 2, and 56 in Year 3; and 4)Working Capital Expenses shall not include capital expenditures, rent payments, professional fees or other non- operating expenses 78

79 Clare Oaks: A Bankruptcy Case Study Additional Authority Requirements (cont’d) Liquidity Support Fund – At closing, a $2,000,000 liquidity support fund was created with a third party escrow agent. – Clare Oaks may draw funds from the Liquidity Support Fund for Working Capital Expenses, provided the following conditions are met: 1)no funds are available in the Unrestricted Reserve Fund ($1.4 million); 2)no funds are available in the Operating Reserve Fund held by the Trustee ($1.15 million), or the Trustee has failed to fund a requisition of funds from the Operating Reserve Fund; 3)no funds are available in the Alternative Working Capital Fund; 4)at the time of the draw the Borrower’s Days Cash on Hand (as defined in the 2012 Bond Documents) is less than 50 in Year 1 after Effective Date, 54 in Year 2, and 56 in Year 3; and 5)Working Capital Expenses shall not include capital expenditures, rent payments, professional fees or other non- operating expenses. 79

80 Clare Oaks: A Bankruptcy Case Study Additional Authority Requirements (cont’d) Liquidity Support Fund (cont’d) – The funding of the Liquidity Support Fund was a $2,000,000 taxable bond, 7% interest with a 5 year maturity, subject to mandatory redemption, which is subject to certain criteria established by the Authority, from funds held in the Liquidity Support Fund. – These bonds were issued on terms similar to the Series 2012A Bonds and secured under the Master Indenture pari passu with the Series 2012A Bonds. – Interest on the Bonds will be payable semi-annually and principal will be payable at maturity, subject to mandatory redemption. Interest earnings on the Liquidity Support Fund will be used to pay interest on the Bonds. 80

81 Clare Oaks: A Bankruptcy Case Study Additional Authority Requirements (cont’d) Bankruptcy Court Final Confirmation Order – The Authority required and the Bankruptcy Court agreed, to modify the Final Confirmation Order to provide that the terms of the approved Plan of Reorganization are subject to the terms of the final bond restructuring transaction documents. 81

82 Q & A


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