UPDATE 2-Sunrise Senior Living shares drop on loan concerns

(Adds spokeswoman comment, restructuring detail)

By Helen Chernikoff and Emily Chasan

NEW YORK, Nov 7 (Reuters) - Sunrise Senior Living Inc (SRZ.N), an operator of senior living facilities, on Friday swung to a loss and warned that it expects to violate two financial covenants by the end of the fourth quarter, sending shares down as much as 38.8 percent.

The company posted a third-quarter loss of $68.7 million, or $1.36 per share, compared with a profit of $38.2 million, or 74 cents per share, a year ago.

Revenue rose 1.5 percent to $436 million.

It said it does not expect to be able to satisfy its leverage ratio and fixed charge financial covenants by the end of the quarter, which means it will be unable to borrow under its facility unless its lenders agree to waive them. The covenants at risk were themselves instituted in order to waive previous requirements, it said.

"With this disclosure, there is a higher bankruptcy risk," Avondale Partners analyst Derrick Dagnan said.

Sunrise said on Friday that the company and its lenders intend to revise and restructure its credit facility by Jan. 31, 2009.

"We are fully committed to continuing to grow and strengthen the company," Meghan Lublin, a spokeswoman for Sunrise Senior Living said.

Should the bank terminate Sunrise's credit agreement, the company would have to repay what it owes. If the company does not have the capital to do that, it is questionable whether it has other sources of financing that would give it that capital, Dagnan said.

Sunrise's chief executive, Mark Ordan, said on a conference call that the company was "working closely" with its banks and "other banks and other non-bank capital sources to explore various sources of liquidity" and was "optimistic."

Ordan said the company would make major reductions in its development pipeline, cease funding in its Trinity subsidiary now, and switch to wait-and-see capital funding for its Greystone subsidiary.

"Sunrise ... is trudging through these terrible capital markets," Ordan said on the call. "While I won't join the ranks of CEOs who say all is well when it isn't, I will point out some facts. We have been proactively clamping down every outflow of cash that doesn't immediately support our core business. We work hard openly and carefully with our banks."

Goldman Sachs (GS.N) is helping the company search for funding, Ordan said on the call.

Standard & Poor's equity research analysts cut their rating on Sunrise shares to "sell" from "hold."

Sunrise's shares have had a rough ride. On Oct 31, they fell as much as 41 percent after the company announced that a sale of 29 properties had fallen through, wiping away a cash infusion. The company's shares are down 93 percent year-to-date, compared with a 36 percent decline in the broader market, as measured by the S&P 500 index .SPX.

Sunrise is suffering from weakened demand as a result of the softer U.S. economy, said Jeff Benton, a partner in restructuring services at consulting firm Grant Thornton.

"Assisted living facilities rely on self pay and they are not inexpensive," he said. "When people lose money in their portfolio, it becomes a problem."

The plunge in home prices is also a problem for Sunrise, as people hesitate to sell their most important asset to move into a managed facility, said David Canavan, a managing director at turnaround firm BBK, who specializes in advice to the senior living sector.

"Home prices have dropped dramatically in some markets and people are holding off," Canavan said.

Sunrise is not the only struggling operator of senior living facilities.

Brookdale Senior Living Inc's (BKD.N) shares are down 78 percent year-to-date and Seattle-based Emeritus Corp's (ESC.N) shares are down 51.5 percent. Brookdale shares hit an all time low of $5.40 per share, before recovering some to finish at $6.22 on the New York Stock Exchange.

Both Benton and Canavan see stronger long-term prospects for the sector as the basic demographics of an aging population reassert themselves.

"I think the underlying demand ultimately will work to the benefit of these companies, they will find significant unmet demand and will continue to grow for the next 10 to 15 years," Canavan said.

Sunrise shares fell 28.8 percent, or 86 cents, to close at $2.13 on the New York Stock Exchange.

Emeritus shares rose about 1 percent or 12 cents per share to close at $11.25 on the NYSE. (Reporting by Helen Chernikoff, Emily Chasan and Lewis Krauskopf; Editing by Gary Hill, Leslie Gevirtz)