July 22, 2021 – The Debtor requested Court authority to access $5.0mn of new money, debtor-in-possession (“DIP”) financing (including $1.0mn on an interim basis) from B.H. Capital Ventures, LLC (the “DIP Lender,” an affiliate of L.A.- based distressed property specialist BH Properties) [Docket No. 233] with a hearing to consider the financing now scheduled for July 28th. A draft of the proposed credit agreement is attached to the motion at Exhibit B.
As described further below, the DIP financing is necessary to take the Debtor through a sale process, and what is likely to be a lengthy regulatory approval process in respect of a sale and new owner, as a going concern. Absent the ability to maintain the business, the Debtor's sales prospects (and proceeds) would likely be crippled, a fact which prepetition lenders clearly acknowledge in their willingness to consent to priming DIP financing from a third-party lender after otherwise declining the opportunity to provide the financing themselves.
Proposed sale-related milestones include an auction by September 3, 2021, a sale hearing by September 30, 2021 and [anticipating the regulatory approval process] closing by April 1, 2022.
On March 16, 2021, the Debtor, a not-for-profit corporation that operates two continuing care retirement communities in California, filed for Chapter 11 protection noting estimated assets between $10.0mn and $50.0mn; and estimated liabilities between $50.0mn and $100.0mn. At filing, the Debtor noted as to the need to seek bankruptcy shelter: "In recent years, CNMH has faced a growing number of financial challenges. These challenges have resulted from, among other contributing factors, changing attitudes of seniors towards institutional care, the difficulty that smaller CCRCs like CNMH have in achieving 'economies of scale' from purchasing and pricing standpoints, direct competition from nearby communities and the devastating impact of the COVID-19 pandemic. These challenges have directly led to the commencement of this Chapter 11 Case."
The DIP motion notes, “This Motion is necessary to avoid immediate and irreparable harm because the Debtor’s expenses continue to exceed its revenues, and, based on the Debtor’s most recent budget, the Debtor will have spent all of its remaining available cash at or around the end of July 2021. The Debtor needs additional cash to continue its operations through the ongoing sale process so that the Debtor can obtain the highest sale price for the benefit of its estate and its creditors. The Debtor has sought alternative DIP financing from its primary banking institution and a number of traditional distressed credit lenders, but the Debtor was unable to obtain a DIP loan on terms more favorable to the Debtor….The Debtor has retained an investment banking firm, B.C. Ziegler and Company (‘Ziegler’), which has begun conducting a sale process for the Debtor’s Properties. The Debtor has received several proposals from interested parties but has not yet selected potential acquisition partners, and once a buyer is identified, a lengthy regulatory approval process must then commence before the sale of the Properties can be completed. To obtain the sale price for the Properties and to maximize the value to the Debtor’s estate and creditors, the Debtor must continue to operate the Communities as a going concern through the close of the sale of the Properties. The Debtor has an immediate need for cash to continue is operations through the close of the sale of the Properties and must obtain credit to obtain that cash.
It is therefore critical that the Debtor obtain the initial $1,000,000 of the DIP Facility in place on an interim basis in order to ensure that the Debtor has enough cash to maintain resident care services and to maintain its business operation. It is also obviously critical that the Debtor be able to demonstrate to its staff, vendors, and residents that the CCRC will continue to provide high quality care, and to function without interruption and that the Debtor will continue to pay vendors in the ordinary course of business. Absent such a showing—and in the event of any interruption or delay in the business— the Debtor’s residents could suffer and staff could pursue opportunities with competitors, which would cripple the Debtor’s business.”
Key Terms of the DIP Facility:
- Borrower: California-Nevada Methodist Homes
- DIP Lender: B.H. Capital Ventures, LLC
- DIP Facility and Borrowing Limits: Maximum of $1.0mn on an interim basis or such lesser amount approved in the Interim Order; subsequent draws as permitted under the Final Order in increments of not less than $500K up to a total maximum of $5.0mn.
- Interest Rate: 7.00% per annum
- Maturity Date: All obligations outstanding under or in respect of the date that is the earliest to occur of: (a) August 31, 2022, (b) acceleration of the DIP Loan pursuant to the terms of the DIP Loan Documents, and (c) the date of substantial consummation of a confirmed plan of reorganization for the Debtor (the “Termination Date”).
- New Money: $5.0mn
- Roll-Up: N/A
- Fees:
- Exit Fee: $73,500 payable upon the earlier of the Termination Date or the repayment of the DIP Loan.
- Break-up Fee: In the event that, following the entry of this Interim Order and prior to the entry of the Final Order, Debtor consummates an alternative postpetition financing arrangement with a person or entity other than Lender, Debtor shall immediately pay Lender the Break-up Fee equal to (a) Lender’s out-of-pocket costs incurred in connection with the DIP Facility, not to exceed $25,000, plus (b) three percent (3%) of the amount to be made available to Debtor in connection with such alternative postpetition financing. The Break-up Fee shall constitute an allowed and immediately payable administrative expense claim against Debtor and its bankruptcy estate, as an actual and necessary cost and expense of preserving Debtor’s estate and in respect of the benefits conferred on Debtor and its estate in making the DIP Facility available.
- Milestones (all sales related):
- Deadline to file bidding procedures motion (or motion for private sale): August 2, 2021
- Deadline for bidding procedures order: August 23, 2021;
- Deadline for qualified bids: August 30, 2021;
- Deadline to hold auction: September 3, 2021;
- Deadline for sale order: September 30, 2021;
- Deadline to close sale: April 1, 2022 (or if private, March 1, 2022)
DIP Marketing Efforts
In a declaration in support of the requested financing (attached as Exhibit C to the motion), the Debtors' Chief Restructuring Officer provides: "The terms of the DIP Facility are the result of a significant market exploration by the Debtor and its professionals. In June 2020, the Debtor and its professionals expanded its efforts to obtain possible debtor in possession financing ('DIP Financing'). The Debtor and its professionals have reached out to City National Bank, the Debtor's primary banking institution, to inquire whether City National Bank was interest in providing DIP Financing and contacted eight financial institutions that provide DIP Financing. Only the DIP Lender and two other entities were willing to provide the Debtor DIP Financing. One of these other parties charged exorbitant rates. The other financial institution made a competitive offer to provide DIP Financing. The DIP Lender then offered to provide DIP Financing on terms that were more favorable and offered a larger credit facility than the other financial institution was willing to provide.
Because of the Debtor’s prepetition debt, obtaining the financing needed as unsecured debt on an administrative priority basis, or as debt which would be secured solely by liens junior to the liens of Wilmington, Cal-Mortgage, and CDSS, was not a viable option, especially from a third party who did not already have a financial interest in the Debtor to protect. Indeed, no lender was willing to provide DIP Financing on an unsecured basis or accept junior liens in connection with DIP Financing. The Debtor thus concluded that adequate alternative financing terms more favorable than those to be provided by the DIP Lenders under the DIP Facility are currently unobtainable. The DIP Lender has agreed to lend $5 million, but would not do so without the protections and priorities sought in the Motion, including, but not limited to, obtaining the first priority senior liens and the superpriority administrative claim treatment of the DIP Lender's claims.
Approval of the DIP Facility is therefore (i) critical to the Debtor’s ability to succeed in its plan to transition ownership and control of the CCRC into stronger hands, freed from legacy liabilities pursuant to the Bankruptcy Code, (ii) in the best interests of the residents, the Debtor and its estate, and (iii) necessary to avoid irreparable harm to the Debtor, its residents, its creditors, and its assets, business, goodwill, reputation and employees.
The Debtor has obtained the consent of Wilmington, Cal-Mortgage, and CDSS to enter into the DIP Facility on the terms set forth in the DIP Loan Documents.
Prepetition Indebtedness
On October 1, 2015, the California Health Facilities Financing Authority (the “Authority”) issued $32,920.000 in revenue bonds (the “Bonds”) at the request of the Debtor. In connection with the issuance of the Bonds, the Authority entered into an Indenture Agreement with Wilmington Trust, National Association (“Wilmington”), under which Wilmington became the indenture trustee for the Bonds and representative of the bondholders. On the same day, the Debtor and various counterparties entered into a series of related transactions in connection with the issuance of the Bonds. The net effect of these interrelated transactions is that (1) the Debtor borrowed $32,920,000 in proceeds from the issuance of the Bonds (the “Bond Debt”); (2) Debtor agreed to repay the $32,920,000 Bond Debt to Wilmington with interest; (3) Cal-Mortgage agreed to guarantee Debtor’s repayment of the Bond Debt to Wilmington; and (4) Debtor granted a security interest in its cash to Cal-Mortgage and to Wilmington to secure Debtor’s repayment of the Bond Debt.
The Bonds currently accrue interest at an annual interest rate of 5%. Interest is paid to the holders of the Bonds semi-annually on January 1 and July 1 of each year. A portion of the Bonds mature annually on July 1 of each year until 2026, and thereafter a portion of the Bonds matures on July 1 in 2030, 2035, and 2045. The principal amount that matures on July 1, 2021 is $630,000. Based on the current outstanding principal balance of $30,225,000, the semiannual interest payment for the Bonds on July 1, 2021 will be $755,625.
DIP Financing Cash Flow Summary
About the Debtor
According to the Debtor: “CNMH is a not-for-profit corporation that operates two continuing care retirement communities (a ‘CCRC Facility,’ and collectively, the ‘CCRC Facilities’). One of the CCRCs, known as Lake Park, is located in Oakland, California. The other CCRC, known as Forest Hill, is located in Pacific Grove, California. Lake Park has 155 residents. Forest Hill has 70 residents.”
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