Blackstone’s Sunwest bid before bankruptcy court

A US judge is expected to rule in February on whether The Blackstone Group’s $209 million bid for 134 senior living properties from bankrupt Sunwest Enterprise should go ahead.

Sunwest said in a statement it was recommending the sale to the Oregon district court next month. The alternative would be to allow a reorganised Sunwest to file as a REIT and continue to own and operate the properties.

If the judge approves a sale, rival firms will have six weeks to top the stalking horse bid from Blackstone and its joint venture partners, after which an auction will be held.

Under the terms of the deal, Blackstone – together with senior living operator Emeritus Corporation and hedge fund Columbia Pacific Management – would pay $209 million cash and assume $945 million in debt for 134 facilities across the US. As the stalking horse bidder, Blackstone and the JV partners would be entitled to a break-up fee of at least $9 million if the deal, which is expected to close in June, didn’t go ahead.

Sunwest was placed into receivership in March 2009, after the Securities and Exchange Commission alleged the firm – once the fourth largest assisted-living provider in the US operating 290 facilities – violated federal securities laws, with key management operating the company as a “virtual Ponzi scheme”.

According to bankruptcy documents, Sunwest ran up a debt load of more than $1.8 billion with 90 different lenders, and between 2005 and mid-2008, raised $485 million in cash through 1,800 TIC (tenant-in-common) investments and LLC memberships. Those investors were told they were investing in specific properties and typically guaranteed an annual 10 percent return plus a 2 percent per annum “buyout premium in the event of sale or refinance”, the documents said.

The SEC found “money raised in new offerings was often used to pay earlier investors their promised payments, pay creditors their returns, and otherwise fund existing operations and other real property assets”, the bankruptcy court document added. A preliminary investigation by the receiver found “rampant” commingling of funds.

However, even prior to the SEC lawsuit, Sunwest was having problems owing to its debt load. After running into cash flow difficulties in early 2008, the firm hired restructuring company Alvarez & Marsal as an advisor, followed in November 2008 by the appointment of turnaround company Hamstreet & Associates to oversee a wholesale reorganisation.

A raft of lawsuits and foreclosure actions in late 2008 from secured lenders and investors also prompted Sunwest to sell 45 of its senior living facilities to Lone Star for $364.2 million, a deal which closed in early 2009.

In October last year, the bankruptcy court agreed Sunwest – now known as Stayton SW Assisted Living – would be dealt with as a single entity rather than several hundred limited liability companies created to own Sunwest's senior living properties.