November 15, 2022 – The Court hearing the California-Nevada Methodist Homes case issued an order [Docket No. 589] authorizing the Debtor to amend the terms of its already Court-approved $34.0mn sale to Pacifica Companies, LLC ("Pacifica" or the “Purchaser”).
Previously, on February 8th, further to an auction held on February 2nd and a sale hearing held on February 4th, the Court hearing the California-Nevada Methodist Homes case issued an order approving the $34.0mn sale (comprised of $33.0mn in cash credit in respect of a $1.0mn break-up fee) of the Debtor’s two California continuing care retirement communities to Pacifica [Docket No. 435 with the original APA filed at Docket No. 428].
That was not the end of the story.
After eight months of waiting for regulatory approval of the Pacifica acquisition from the Attorney General for the State of California (the "California AG"), that approval was finally granted; not, however, on terms that were acceptable to Pacifica. After initially threatening to walk away from the purchase (as noted below, not the first time that Pacifica has threatened to walk as it looked for better terms), the Debtor, Pacifica and its primary secured creditor, the California Department of Health Care Access and Information ("HCAI") have worked out a triangular deal that saves the transaction and nominally keeps the headline $34.0mn sale price. Further to the terms of the deal, the cash price has been reduced by $15.0mn with that consideration replaced by a $15.0mn note issued by a Pacifica affiliate. The note, however, is issued with terms "so favorable to the Buyer" that its fair market value is less than the $15.0mn of cash it replaces. The solution, in order to ensure that the Debtor gets the full $34.0mn of value, is for the Debtor to assign the note to HCAI; with HCAI agreeing to reduce its secured claim against the Debtor by $15.0mn.
In issuing the order, the Court noted as to the new structure: "The Amendment does not materially change the terms of the sale of substantially all of the Debtor's assets as approved by this Court…"
The motion notes, “This Court previously approved the Debtor’s sale of substantially all of its assets (the ‘Asset Sale’) to Pacifica Companies, LLC (‘Pacifica’) or its assignees (each, a ‘Buyer’ and collectively, the ‘Buyers’) for $34 million in consideration pursuant to the December 17, 2021 Purchase and Sale Agreement (‘PSA’) between Pacifica and Debtor. The Buyers’ obligations to close the Asset Sale are contingent on, among other things, the Attorney General for the State of California (‘California AG’) approving the Asset Sale on conditions that were acceptable to Pacifica. After nearly eight months of waiting, the California AG finally approved the Asset Sale. But the California AG imposed conditions that were not acceptable to Pacifica, and Pacifica initially refused to proceed with the Asset Sale under the California AG’s conditions.
The Debtor and its primary secured creditor, the California Department of Health Care Access and Information (‘HCAI’), thereafter worked diligently to save the deal and entice the Buyers to close the Asset Sale for $34 million in consideration, as previously approved by the Court. Eventually, Debtor, HCAI, and Pacifica came to an agreement (the ‘Binding Term Sheet’) that would accomplish that objective. In exchange for a $15 million reduction to the cash payment at closing, one of the Buyers would provide Debtor a $15 million promissory note (the ‘Carry Back Note’). But the terms of the Carry Back Note would be so favorable to the Buyer, that the fair market value of the Carry Back Note was likely less than the $15 million cash reduction the Buyers would receive in exchange. To remedy this and to ensure that Debtor actually received $34 million in consideration for the assets Debtor is selling (the ‘Assets’) in the Asset Sale, HCAI agreed that it would accepts an assignment of the Carry Back Note from Debtor in exchange for a $15 million reduction of HCAI’s secured claim against the Debtor.
The net effects of these transactions are that (1) Debtor induced the buyers to proceed with the Asset Sale notwithstanding the more onerous conditions the California AG imposed, (2) the Asset Sale would not require another lengthy regulatory review process before closing, (3) the Buyers would pay $15 million less cash at closing but would be obligated to repay the Carry Back Note to HCAI, and (4) the Debtor would receive $15 million less cash at closing in exchange for a $15 million reduction to the secured claim held by HCAI – the party that would have eventually received the $15 million in cash if the Buyers had instead paid cash.”
In November 2021, Pacifica exercised its right to withdraw from a Court-approved private sale further to which it had agreed to a $39.3mn purchase price. When it returned as a stalking horse in a proposed section 363 auction/sale process in mid-December, it did so with a considerably reduced $30.0mn stalking horse bid.
The Debtor's notice of auction results notes: "The form of Purchase Order for Pacifica's Successful Bid is attached hereto as Exhibit A, with the exception that the "All Assets Purchase Price" as used therein has been increased to $34,000,000, consisting of $33,000,000 in cash and a $1,000,000 credit bid of Pacifica's Break-Up Fee." Proceeds are to be used in the first instance to repay debtor-in-possession ("DIP") borrowings in full.
Critical to residents and/or their estates is that Pacifica has agreed that "it will pay the repayable portion of each Resident Entrance Fee Payment ('Repayable Entrance Fees') upon re-occupancy of such resident’s unit regardless of the type of agreement entered into with the new occupant of the unit, including amounts
which became due and payable any time prior to Closing."
The order provides: "After the Auction concluded, the Debtor named Pacifica Companies LLC ('Pacifica') as the Successful Bidder with a Successful Bid (as that term is used in the Sales Procedures Order) of $34,000,000 on the terms set forth in the Stalking Horse Agreement and named Heritage Campus Group ('Heritage') as the Backup Bidder with a Backup Bid (as that term is used in the Sales Procedures Order) of $34,250,000* on the terms set forth in the Purchase and Sale Agreement signed by Heritage and dated January 31, 2022 ('Heritage's Purchase Agreement'). The Debtor thereafter filed copies of the Stalking Horse Agreement and Heritage's Purchase Agreement (collectively, the " Purchase Agreements") in the Chapter 11 Case, indicating the Purchase Price for the Successful Bid and the Backup Bid as stated above (ECF #428)"
* There was no mention of the Heritage bid at the sale hearing at which Heritage did not appear to be represented; nor was there any discussion at to why the facially superior Heritage bid (including a $250k minimum bid increment) was not selected by the Debtors as the successful bid bid.
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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The post California-Nevada Methodist Homes – Finding that New Triangular Deal Structure “Does Not Materially Change the Terms of the Sale,” Court Court Approves Amended Terms of Pacifica Asset Sale appeared first on Daily Bankrupt Company Updates | Bankrupt Company News.