Erickson picks local firm as buyer

Hanover-based Redwood outbids N.Y. firm in 'grueling' auction for bankrupt company

December 24, 2009|By Jamie Smith Hopkins | jamie.smith.hopkins@baltsun.com

In a "grueling" 18-hour auction that finished early Wednesday, Erickson Retirement Communities selected a local investment firm over a New York bidder as its buyer - part of the effort to bring the Catonsville senior-living firm out of bankruptcy reorganization.

Erickson did not disclose the terms of the transaction but said Hanover-based Redwood Capital Investments LLC was the successful bidder in the auction, which put on the block almost all of the company's assets. The sale will require bankruptcy court approval.

The company has repeatedly said that neither the bankruptcy filing nor the sale would change residents' living arrangements or jeopardize their refundable entrance fee deposits, which can be more than $400,000. It has 19 continuing-care retirement communities across the country, including Charlestown in Catonsville.

Erickson - hurt by the severe tightening in credit and depressed housing market - filed for Chapter 11 bankruptcy protection in October. It said then that it had an agreement to sell itself to Redwood Capital, which is controlled by Jim Davis, majority owner of the Hanover-based staffing firm Allegis Group.

But Erickson later received another "qualified" bid from a team led by Kohlberg Kravis Roberts & Co., a New York private equity firm that specializes in complex buyouts. CoastWood Senior Housing Partners was part of the KKR team, according to a court filing.

The auction began 10 a.m. Tuesday in New York and ended Wednesday just shy of 4 a.m. John C. Erickson, founder and executive chairman of the senior-living company, described it as "grueling" in a letter to employees. Bruce R. "Rick" Grindrod Jr., Erickson's president and chief executive officer, said in an interview Wednesday afternoon that he was operating on about 90 minutes of sleep. The auction took as long as it did because it wasn't just the company, bidders and lenders with an interest in the outcome, but also all the separate nonprofit groups that operate Erickson communities.

Whether an auction would even be held was in question for a while last week, according to a transcript of a bankruptcy court hearing, because attorneys for the nonprofits were wrangling with the many other lawyers about what say they would have.

"There are a lot of constituents, and it's a very complicated financial structure," Grindrod said.

KKR, the losing bidder, declined to comment. Redwood's Davis did not return phone calls requesting comment.

PNC Bank, an Erickson lender and the administrative agent for lenders owed more than $264 million by Erickson, objected in October to the planned bidding process and the agreement with Redwood. PNC said that marketing efforts to potential bidders had been "anemic" and that the procedures were designed to ensure Redwood's success "on terms favorable to Redwood and unfavorable to all other interested persons."

It also alleged that Redwood's deal includes an undisclosed sweetener for founder John Erickson: a 10 percent ownership stake in each of at least two of the Redwood entities planning to purchase the senior-living company.

"This relationship raises the appearance of impropriety," PNC's filing says, adding later: "This is a case that needs the Court to conduct or closely supervise the auction to assure prospective bidders and creditors that the auction is fair and not simply a mechanism for Redwood to exploit the Debtors and their assets."

PNC declined to comment Wednesday.

Grindrod, with Erickson, said he would not respond to PNC's allegations. But he said he didn't believe the bidding process was altered by the court.

Houlihan Lokey, an investment banking firm representing Erickson, ran the auction and determined that the Redwood bid had a higher "total value to all the constituents," Grindrod said. He did not specify whether the dollar amount of that bid was higher.

In his letter to employees Wednesday morning, John Erickson said Redwood offered "an all-cash bid that leaves Erickson debt-free going forward." He wrote that he "strongly" believes Redwood is the right choice to lead the company out of bankruptcy.

"Although I worked diligently to keep the playing field level, it is only human to develop a personal bias as you get to know the parties and their goals and mission," he told employees.

The company was deep into a big expansion effort when the housing market began deteriorating, and afterward it was unable to fill units in its new communities quickly enough. Seniors typically pay the refundable entrance fees with money from the sale of their homes, and selling homes became increasingly challenging after 2005.

A further complication is that Erickson had move-in targets in its construction-loan terms. As the number of move-ins declined, its financiers declared the company in violation. Grindrod said the company tried negotiating before filing for bankruptcy, but it had a difficult time hammering out restructuring agreements with its nearly 50 lenders.

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