McDermott Offers Strategies for Addressing the Credit Crunch Facing Continuing Care Retirement Communities
BOSTON (June 22, 2009) —Continuing Care Retirement Communities (CCRCs) across the nation are in distressed circumstances. Falling personal net worth and dislocation in the housing market is resulting in slower fill-ups and lower occupancy rates as seniors remain stuck in their existing homes. To help address these serious issues, McDermott Will & Emery LLP sponsored a webinar “CCRCs – The Credit Crunch Comes to the Senior Housing Market.”
CCRCs facing financial covenant defaults or a looming maturity date on their debt have few refinancing alternatives. Many lenders have opted out of the CCRC market making for a particularly gloomy environment. The many different stakeholders in a distressed CCRC are facing operational challenges, regulatory issues, and refinancing hurdles as they search for solutions to a very complex situation.
The speakers noted that management issues and solutions are particularly complicated in multi-site operations where there might be a commingling of cash and lack of focus by the home office.
McDermott lawyers urged participants to:
• Be transparent in their dealings with regulators and other stakeholders. Know your documents and recognize that problems may arise when those documents are interpreted differently by other parties.
• Document everything, especially covenant violations and upcoming maturity dates.
• Consult all stakeholders, especially state and local regulators.
• Be proactive when seeking alternative lending sources.
• Prefer durable solutions to temporary ones.
A troubled CCRC must identify the source of the problem before taking action, cautioned Christopher J. Donovan, a partner in the Firm’s Boston office and a member of the Corporate Department and Health Law Group. “A troubled CCRC is a unique animal,” said Donovan. He stressed that a CCRC must fix the issues at the facility level before a lender would address the financing issues.
Operational issues such as cost overruns, occupancy rates, service delivery, reputation and reimbursement issues must be addressed by focusing on expense controls, capital expenditures and the use of endowments, management change, rebranding and observational rights. Market issues, driven by both demand and supply, might be addressed by the use of endowments, a receiver’s involvement without bankruptcy, unit pricing, seller unit financing or spreading payments over a period of time, closure or conversion of skilled care units, and the possibility of rental instead of ownership.
William P. Smith, a partner in the Firm’s Chicago office and co-head of the Restructuring & Insolvency Practice Group, discussed solutions to financial issues, noting that solutions “depended on the severity and deficiency of the cash flow situation.” Smith observed that a distressed CCRC must find “one fix because serial workouts are frowned upon by the financial community.” Smith discussed such possible solutions as debt exchanges, debt restructure by forbearance, covenant or loan terms relief and conditions, equity infusion with a joint venture partner, bifurcating the debt structure, subdividing a facility and a Section 363 sale in bankruptcy.
