Chris Glenos Reviews Distressed Long-Term Care Assets: Insights from a Lender’s Perspective

Chris Glenos, an accomplished creditors’ rights attorney with extensive expertise in complex insolvency and bankruptcy-related litigation, understands that the long-term care (LTC) industry, which encompasses skilled nursing facilities (SNFs), assisted living facilities (ALFs), and memory care facilities, is facing significant financial challenges. As the practice group leader of Bradley’s Bankruptcy and Creditors’ Rights Practice Group, he routinely represents clients in commercial litigation, fraudulent transfer and preference actions, receiverships, contested bankruptcy matters, lender liability claims, commercial foreclosures, executions, replevin actions, and prejudgment seizures. The COVID-19 pandemic has exacerbated many pre-existing issues in the LTC industry, leading to a notable rise in loan defaults and financial distress within these facilities. Glenos has successfully navigated and mitigated financial crises in the LTC sector, representing lender clients in numerous complex workouts and restructurings outside of court. Some key factors contributing to this financial instability include:

• Escalating operational costs due to increased labor expenses and inflation
• Persistent staffing shortages
• Low reimbursement rates and related issues
• Decreasing occupancy rates
• Technological advancements, such as telehealth and home health-monitoring devices, enabling more seniors to age at home
• General negative operating margins Overbuilding in certain markets
• Lack of affordability for necessary services for seniors requiring care

Proactive Measures for Lenders

In the current climate, it is crucial for lenders to actively monitor their LTC loan portfolios and be prepared to assist borrowers facing financial difficulties. To anticipate and mitigate financial risks, here are some steps that lenders should consider according to Glenos:

1. Create a Watchlist: Identify borrowers at high risk of financial distress.
2. Maintain Communication: Engage in regular, consistent communication with LTC borrowers.
3. Financial Review: Assess the financial health of borrowers, especially those on the watchlist.
4. Enforce Compliance: Ensure strict adherence to financial reporting requirements and closely monitor financial covenants.
5. Census Information: Regularly obtain and review census data.
6. Review Loan Documents: Check loan documents, including covenants and reporting requirements, for completeness and accuracy. Address any deficiencies before defaults occur.
7. Security Documents: Ensure security documents are properly drafted, executed, and recorded; liens and security interests are perfected; and financial statements are current.

Responding to Loan Defaults

When a LTC borrower defaults, Glenos explained that lenders should take immediate and strategic actions to protect their interests:

1. Engage Experienced Counsel: Promptly hire workout and restructuring counsel with expertise in distressed LTC assets. Delays can be detrimental to the lender's position.
2. Reserve Rights: Issue a written notice to the borrower and other relevant parties to reserve the lender’s rights and remedies, even if formal actions are delayed.
3. Evaluate the Default: Investigate the source of the default and assess the borrower’s true financial condition. Determine if the issues are fixable or fatal and if current management can rectify the situation. Consider if a turnaround consultant can add value.
4. Assess Lender's Position: Review the lender’s rights, remedies, and collateral position. Determine if the lender is over-secured or under-secured and evaluate the borrower’s other financial obligations and level of cooperation.
5. Consider Recourse Options: Identify if any recourse carve-out events, such as fraud or misrepresentation, have been triggered. Understand the default remedies available under the loan documents and applicable state law.

Strategic Actions for Restructuring

If pursuing a negotiated workout or restructuring, review the following strategies:

• Pre-Negotiation Agreements: Enter into a pre-negotiation agreement with the borrower, particularly if litigation is likely or if the borrower is adversarial.
• Define Success: Establish what a successful outcome looks like and develop a strategy to achieve it. Consider:
  • Loan modification agreements or amendments to loan documents
  • Forbearance agreements if a sale, refinancing, or other exit strategy is pursued
  • Extrajudicial enforcement actions to control the borrower’s cash and receivables
  • Judicial enforcement actions to obtain monetary judgments or equitable relief
  • Foreclosure to take ownership of the facility
  • Receiverships to appoint a neutral party to oversee operations and market the facility for sale

Planning for Bankruptcy

Glenos noted that quick action will be necessary to protect the lender’s position if a bankruptcy petition is filed. As such, discuss with counsel the implications of a potential bankruptcy filing and develop a contingency plan. Despite the challenging environment in the LTC sector, lenders can take proactive steps to safeguard their investments. Glenos emphasized that by ensuring their legal rights and remedies are well-documented and preserved, lenders can better navigate the financial turbulence affecting long-term care facilities. Regular review and strategic planning are essential to maintaining a strong position in this volatile market.