In the matter of the bankruptcy and ultimate sale of Erickson Retirement Communities, Inc. (ERC), HMP was engaged as financial advisor to National Senior Campuses (NSC), the not-for-profit counterparty at eighteen of the twenty ERC managed communities. At the time of the ERC bankruptcy, the NSC communities had over 22,000 residents and total assets in excess of $4 billion. The NSC communities were located in twelve different states, each with a unique regulatory environment.
Issues
- NSC was paying ERC over $40 million per year to manage its communities; these contracts represented the most valuable asset in the ERC estate
- At the time of the ERC bankruptcy, NSC had advanced to ERC over $1.2 billion in “Community Loan Obligations” to fund the continuing construction of twelve NSC communities which were then under development
- Additionally, three NSC communities had advanced ERC an aggregate of over $600 million in tax-exempt bond proceeds as a purchase deposit to be applied against the ultimate purchase of the real property
- Excluding amounts owed to the NSC communities, ERC had commercial debt totaling more than $1.2 billion, which was spread across multiple overlapping banking syndicates with a total of 59 separate participants
- For the twelve NSC communities then under development by ERC, each community’s claims were legally subordinated to those of the banks and bond holders. Also, the community’s licenses and resident and care agreements were pledged as collateral under its development agreements with ERC
- The ERC obligations, including “Resident Purchase Refund Rights” could be rejected or modified in a foreclosure or bankruptcy proceeding
Approach
- HMP terminated and renegotiated management contracts at all NSC communities into 30-day contracts which must be affirmatively renewed each month by each community to be extended for another 30-day period
- Created an option for an “NSC-Owned Management Company” as an alternative to ERC and secured a commitment from the eighteen community boards of directors to move forward if favorable terms could not be secured in the ERC bankruptcy and sale
- Met with state regulators and secured commitment for a “resident-centric” approach to any restructuring
- Developed new master management and development contracts, which would be acceptable to the NSC communities as long-term contracts; this approach was designed to communicate to ERC’s creditors and the potential buyers of ERC that the communities would be willing to commit to valuable long-term agreements, provided that they had a prominent role in the process
Results
- Services were provided during the bankruptcy and sale on an uninterrupted basis for the 22,000 NSC residents
- NSC was able to dictate the terms of sale of ERC in exchange for entering into ten-year management contracts with the buyer
- The new contracts included substantial new protections for the communities and their residents, including the right to terminate the agreements if stringent financial performance and employee and resident satisfaction criteria are not met by the new buyer
- Designed and implemented a new business model for the financing of developing communities, which provides a very specific guarantee of the individual resident’s rights under the existing “Residence and Care Agreement” and obligates the developer to provide and repay working capital for the developing community prior to the collection of any cash rents
- Reinstated all $1.2 billion of the community loan obligations