ANALYSIS: Municipal Bond Defaults Signal Senior Living Distress

Embattled by the Covid-19 pandemic, the senior living sector is now facing the challenges of diminished occupancy, the end of emergency government support measures, staff shortages, and rising costs. These challenges are similar to those I explored recently with respect to nursing homes.

A January report from Municipal Market Analytics (MMA) found that in 2021, first-time municipal bond defaults for borrowers associated with senior living hit a record high. These accounted for just over half of first-time municipal bond defaults overall.

Senior living entities frequently access financing through tax-exempt municipal bonds. In these transactions a municipal entity issues bonds and then lends the proceeds to a senior living borrower. The bond documents typically provide the indenture trustee with rights against the borrower in the issuer’s loan.

Counsel for senior living borrowers, their respective indenture trustees, and other major creditors will want to familiarize themselves with the underlying bond documents, explore potential pathways from a municipal bond default, and research possible legal issues. Some trustees and borrowers may enter into forbearance agreements, especially if the borrower’s long-term prospects are sound and it has the ability to survive a temporary cash crisis.

Alternatively, the indenture trustee may force a borrower into a court-supervised receivership, possibly with the intent of conducting a company sale. In these situations, a borrower might file a bankruptcy case in order to wrest back control from the receiver.

In another scenario, borrowers might work with the indenture trustee on a restructuring support agreement for a pre-packaged Chapter 11 plan, especially if there are no significant issues with other creditors. Finally, there may be situations where a traditional Chapter 11 case is the best alternative.

Resources for understanding Chapter 11 are available in our Practical Guidance: Voluntary Chapter 11 suite. Monitor developments of bankruptcy cases with Bloomberg Law Dockets.

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