Investing in the High Yield Municipal Market: How to Profit from the Current Municipal Credit Crisis and Earn Attractive Tax-Exempt Interest Income

Distressed Opportunity: National Benevolent Association

One of the most successful distressed municipal opportunities in recent memory involved tax-exempt bonds issued by the National Benevolent Association (NBA), which filed for bankruptcy in February 2004. It remains to this day one of the largest nonprofit bankruptcies ever. Although the final outcome was unusually favorable to bondholders, and therefore not typical of most distressed situations, the case can still serve as an informative (and colorful) illustration of the potential risk/reward of distressed investing.1

The National Benevolent Association was founded in 1887 as the health and social services arm of the Christian Church (Disciples of Christ). As a Missouri-based nonprofit organization, its lofty mission was to provide health and social services to children, disadvantaged families, and others. Until the early 1990s, to fulfill its mission, the NBA operated about a dozen nursing homes, some child care centers, and 76 HUD-financed, low-income housing projects.

In the early 1990s, under the leadership of its president, Cindy Dougherty, the NBA decided to expand into senior living construction and management as a way to augment its cash flows. The ambitious plan involved the construction and purchase of high-end senior living facilities, including some CCRCs, all financed through the issuance of about $230 million in tax-exempt debt. Since the new senior living facilities would not be cash-flow positive for a few ...