Thu 07/15/2021 15:22 PM
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Editor’s Note: Reorg will host a webinar discussing recent credit trends in continuing care retirement communities, or CCRCs, on Thursday, July 22, at 11 a.m. ET. To register for the webinar and to join the discussion with our Americas Municipals coverage team, please sign up HERE. Continue reading below as our Americas Municipals team provides an update on the MRC The Crossings liquidity and click here to request a trial for access to the relevant documents below as well as our analysis and reporting on hundreds of other stressed, distressed and performing credits.

Relevant Documents:
May 2021 Status Report (July 14)
Waiver Notice (April 29) and Restated Waiver Notice (May 14)
2020 Financial Statements
Official Statement

After receiving a waiver from its bondholders for covenant breaches at the end of 2020, continuing care retirement community MRC The Crossings is still well below its historical debt service coverage ratio and liquidity covenants, according to a status report it posted to EMMA on July 14. The Crossings, in League City, Galveston County, Texas, is a borrower on $73.5 million in retirement facility revenue bonds issued by the Red River Health Facilities Development Corp. The bonds are secured by a lien on the facility and a pledge of its revenues.

The Crossings is owned by Methodist Retirement Communities, or MRC, which is a Texas nonprofit corporation that operates a number of CCRCs in Texas, including Stevenson Oaks in Fort Worth, which last month notified its lenders that it was delaying posting its consolidated audit report to EMMA because of a possible breach of its debt service ratio covenant for which it was seeking its own bondholder waiver.

According to the offering statement on The Crossings’ bonds, the borrower is subject to a debt service coverage ratio covenant and a liquidity covenant. The borrower is required to maintain a DSCR of 1.2x each calendar year, or else, generally, it must hire a consultant to make recommendations to increase the DSCR to meet the threshold; if the borrower fails to maintain a DSCR of 1.0x for any fiscal year, it is an event of default. The liquidity covenant requires that the borrower maintain, as of June 30 and Dec. 31, a cash-to-indebtedness ratio of 0.25x and at least 180 days’ cash on hand, or else, generally, it must hire a consultant to make recommendations to increase liquidity for future covenant testing dates.

According to the borrower’s July 14 report, however, the borrower would not have met its DSCR and its liquidity covenants had the covenants been tested at the end of May. Its debt service coverage ratio was 0.7x - well below the 1.0x event of default level and the 1.2x threshold for hiring a consultant. Moreover, it had only 136 days’ cash on hand - below the 180 required - and its ratio of cash to indebtedness was 0.11x - below the 0.25x required.

The Crossings has been in breach of these covenants for some time. In its financial statements for the year ended Dec. 31, 2020, posted on June 8, The Crossings said it was “not in compliance with the required Historical Debt Service Coverage Ratio and Liquidity Covenants which is considered an event of default” but that it “received a waiver and consent that would waive the Historical Debt Service Coverage Ratio, Liquidity Covenant, and requirement to retain a consultant to provide a report in relation to the missed covenants for the fiscal periods June 30, 2020 and December 31, 2020.”

That waiver was first sought around April 29, when bond trustee UMB Bank posted a notice to EMMA (which was restated in order to correct typos on May 14) noting that the borrower was requesting that its bondholders waive the DSCR default and the requirement to hire a consultant triggered by the DSCR and liquidity covenant breaches, so long as The Crossings provided a management report describing the causes of its covenant failures and “the policies or procedures that management has implemented to” meet the DSCR for the calendar year, as well as the liquidity requirements for the June 30 and Dec. 31 testing dates.

The form of bondholder waiver posted to EMMA did not, by its terms, require public disclosure of any management report prepared by the borrower. As noted above, the next testing date for the liquidity covenant would be June 30. The borrower has not yet publicly disclosed its cash position for the month of June.
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