(Bloomberg News) BlackRock Inc., Nuveen Investments Inc. and Federated Investors Inc. learned how bondholders can get swept into a bankruptcy when a Chicago high-rise retirement community became 2011's second-largest municipal default.

After the 53-story Clare at Water Tower, with views of Lake Michigan from the city's Gold Coast neighborhood, entered bankruptcy last year, the court doled out about 17 cents on the dollar, on average, for $233 million of debt, records show.

"Bondholders took a real beating," said Richard Larkin, senior vice president and director of credit analysis with Herbert J. Sims & Co., in Iselin, New Jersey. In the $3.7 trillion muni market in 2011, the default trailed only those triggered by AMR Corp.'s bankruptcy, said John Hallacy, muni- research head at Bank of America Merrill Lynch in New York.

Fundamental Advisors LP, a private-equity firm, led a partnership that bought the tower at auction for $53.5 million. Now retiree apartments there are offered for $595,000 that were listed at $1 million. The restructuring underscores the risk taken by buyers of debt backing speculative health-care, special-assessment and industrial projects that comprise 75 percent of municipal defaults, according to Hallacy.


By cutting The Clare's debt burden, Fundamental and its partners can improve food service, health care, the building's appearance and management, said Laurence Gottlieb, co-founder and chief executive officer of the New York company. The changes "make The Clare extremely competitive," he said.

"Our plan is to achieve its full potential as a high-end retirement community," Gottlieb said. "The Clare is now debt- free, which gives us tremendous flexibility with our contracts and the ability to offer peace of mind to our residents."

Lenders who backed The Clare's development as a nonprofit continuing-care community won't benefit. About $39 million is available for bondholders from the proceeds of the transaction, according to a July 27 disclosure notice from the Bank of New York Mellon, trustee for the securities.

U.S. tax law allows nonprofit organizations to sell municipal bonds for public-purpose facilities such as The Clare. The Illinois Finance Authority sold about $233 million of tax- exempt debt for the building's developers in 2005 and 2010.

Some of the bonds traded between 18 cents and 19 cents on the dollar in April and May, trade disclosure reports show.

17 Cents

Different classes of bondholders will get varying amounts based on their status in the bankruptcy. Some will receive 100 percent of principal; others must settle for less than 17 cents on the dollar.

For almost a year before The Clare sought protection under Chapter 11 of the U.S. bankruptcy code, BBB rated continuing- care retirement communities yielded more than a fifth of a percentage point higher than similarly rated hospital bonds, according to research released in January by Susannah Page, a Bank of America strategist. About 1,900 issues have been sold for continuing-care communities, worth about $37.7 billion, according to Page.

Yet this year, that category has accounted for $138 million of $549 million in payment defaults, JPMorgan Chase & Co. research shows. The Clare accounts for 31 percent of outstanding muni defaults by retirement homes, according to Municipal Market Advisors data.

Collapsing Values

BlackRock, Nuveen and Federated are cited as bondholders in bankruptcy documents that don't specify the extent of losses they may face, if any.

Lauren Post, a spokeswoman for New York-based BlackRock, declined to comment. Nuveen didn't buy any bonds for The Clare, obtaining them when it acquired FAF Advisors Inc., said Kathleen Cardoza, a spokeswoman for Chicago-based Nuveen. Ed Costello, a spokesman for Pittsburgh-based Federated, declined to comment.

The collapse in property values and other markets during the financial crisis, which helped keep The Clare's revenue and occupancy below projections, still plagues continuing-care communities, said Karl Propst, a Dallas-based Standard & Poor's analyst. Facilities such as The Clare depend on residential sales by newcomers to cover entrance fees. They also rely on investing those payments to cover part of the cost of care.

"There is a real correlation with the real-estate market because people have to sell their houses to move in," said Alan Schankel, head of fixed-income research at Janney Montgomery Scott LLC, an investment bank in Philadelphia. He follows some retirement centers located in his home state.

Magnificent Mile

Built near Chicago's Magnificent Mile, The Clare billed itself as the city's first high-rise elder-care community. The development, with 248 apartments for independent retirees on Loyola University's Water Tower campus, cost more than $250 million, according to Chicago Senior Care LLC, the new owner.

The 750,000 square-foot building also has 39 assisted- living apartments, 15 "memory support" suites and 32 nursing beds. It houses dining areas, chapels and fitness and aquatic centers.

The Clare's opening in 2008 was slowed by construction delays and initial occupancy failed to meet forecasts. The property was developed by the Franciscan Sisters of Chicago Service Corp., based in Homewood, Illinois. It skipped a September debt-service payment last year and the project entered bankruptcy in November.

"It was the wrong plan at the wrong time." said Larkin at Sims. He also said the occupancy rate relied on a buoyant housing market to let retirees raise the capital needed to join.

Debt Burden

At Fundamental, managers began watching The Clare about when it opened, said Jonathan Stern, a director with the firm who handled the day-to-day aspects of the deal. They knew that with its debt burden, The Clare couldn't cut entrance fees to compete for residents, he said.

When Fundamental took over, occupancy stood at about 30 percent. It plans to cut entrance fees, reducing an apartment- with-care contract that is 90 percent refundable on moving out to as low as $500,000 from $750,000. The company plans to invest about $1 million in improvements, including making public areas more attractive.

Fundamental, which focuses on projects that are struggling in the municipal market, has investments of $10 million to $50 million each in 30 projects in about 25 states, including Atlanta's WestMar Student Lofts, the AutoZone Park in Memphis, Tennessee, and The Curtis hotel in downtown Denver.

The company, which Gottlieb started with Dana Fusaris, formerly with Madison Capital Management, controls about $750 million in assets. Fundamental's investors include pensions, endowments and high-net worth individuals. In June, Hector Negroni, a former Goldman Sachs Group Inc. managing director who oversaw munis, joined as co-chief executive officer and chief investment officer of Fundamental Credit Opportunities.

Governments facing pressure from employee health-care and pension costs, as well as funding critical services with slow- growing revenue, will create "opportunities to invest in the rehabilitation of core assets and service core assets providing essential services," Gottlieb said.

Following are pending sales:

CHICAGO plans to issue about $1.2 billion of revenue bonds for O'Hare International Airport to refinance debt, according to bond documents. About $729 million of the offer will consist of general airport senior-lien revenue debt, set to price as soon as Aug. 8, data compiled by Bloomberg show. Moody's Investors Service last month downgraded O'Hare general-revenue bonds one level to A2, its sixth-highest grade. In another segment of the deal, the city will issue $443.3 million of passenger-facility charge revenue bonds. Moody's rates that sale A2. (Added Aug. 2)

NEW YORK CITY TRANSITIONAL FINANCE AUTHORITY plans to offer $1.55 billion of subordinate debt starting as soon as Aug. 6, according to the city's Office of Management and Budget. The sale, backed by tax receipts, includes $850 million of tax- exempt bonds that will go toward financing capital projects and refunding. The agency also plans to sell $350 million of taxable bonds, as well as $350 million of tax-exempt, variable-rate bonds set to price Aug. 28. S&P rates the authority's subordinate credit AAA. (Added Aug. 1)