The unique nature of a municipality’s business and revenue sources pose many challenges distinct from those encountered by a typical corporate bankruptcy.
Working with an indenture trustee with a proven track record of success and experience can enhance the process and protect bondholder value. UMB’s workout team includes long-tenured specialists with an average of more than 20 years of experience handling hundreds of distressed and defaulted debt instruments. Below, our team shares considerations for executing a successful turnaround.
1. Bring in the right trustee and advisors
Some of the best outcomes result from collaboration among the distressed entity, its professionals and the trustee and its professionals. As a result, it is critical that the bondholders ensure the trustee acting on their behalf has a keen understanding of the restructuring goals and has a track record of success.
A successful indenture trustee, works with the obligor or conduit issuer and external advisors, including financial advisors and counsel. This allows your provider to partner successfully with all involved parties to execute a turnaround phase and bring financial resolution to the bondholders.
Sometimes, this collaboration requires the indenture trustee to work directly with a general receiver or other parties responsible for managing the day-to-day operations of properties during a turnaround. One aspect of a trustee to look for is those with experience as practicing attorneys, which helps ensure your team understands the legal complexities of distressed debt and delivers an enhanced level of insight into the process. Each of UMB’s workout specialists have experience as practicing attorneys for this very reason. Additionally, having experienced advisors on both sides of the transaction creates efficiencies in communication and solutions.
2. Take a long-term approach
Financial distress in municipal bond transactions is often caused by the revenue challenges of an obligor. For example, a senior housing facility may not be generating as much revenue as initially projected. These challenges may lead to covenant compliance issues and payment defaults. It’s important to remember that turnarounds and default workouts don’t happen instantly. While financial recovery is the end goal, not every decision from the beginning of a turnaround should be made solely to cut expenses or make debt service payments.
Payment of the debt service obligations is undoubtedly important. In many circumstances, however, the next scheduled bond payment should not be the sole driver of a trustee’s actions. As a representative of bondholder interests, trustees must instead convey the importance of turning a troubled investment into one with a healthy long-term outlook—not just one that will meet its next payment.
When looking specifically at turnarounds for senior housing and senior care facilities, crucial actions are needed to turn a property into a financially resilient long-term investment. For example, if a facility is deferring maintenance on its property to make debt service payments, it’s not setting itself up for long-term success; the short-term bond obligations are being met while putting the property, its residents and bondholders at greater risk in the future. If a senior housing facility falls into disrepair or endures a decline in the quality of its care or service, it will experience resident attrition, likely reducing any ultimate recoveries in connection with a restructuring or sale of the facility.
Investors, indenture trustees, general receivers, chief restructuring officers and other advisors need to have perspective and understand the long-term goal. Indenture trustees work to balance the operational needs of the facility with the potential recovery, and they ensure actions taken are consistent with the long-term strategy and goals.
3. Be proactive throughout the process
A successful turnaround requires advisors who are willing to make decisions and be an active participant in the process. This applies to the trustee, as well. It is critical that the trustee be closely involved in operational and financial assessments to identify a path toward stabilization.
Through hands-on experience, we have found that successful turnarounds always require a trustee who communicates often and clearly to bondholders and other advisors to navigate properties to financial recovery.
With more than 75 years in the corporate trust space, UMB has distinguished itself as a proactive, communicative advisor. Whether your needs are traditional or highly complex, the UMB corporate trust and agency teams can smooth processing and administration. We’re with you every step of the way. Learn more about our nationally ranked services for bond issuers and specialized offerings around asset-backed securities, distressed debt, loan agency and more or contact us to be connected with a corporate trust team member.
