OUT-OF-COURT RESTRUCTURING a service of The Deal
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Hard-to-find deal details, all in one place
Our senior journalists uncover the hard-to-find details of the restructurings. Packaged in our Out-Of-Court Memos, we include the debt structure, deal details, ratings from the top agencies and advisory assignments.
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Distressed investment opportunities
Read about potential targets in Red Letter Dates and the Charred Covenants table tracking firms in, or near, violation of financial covenants.
Out-of-Court Restructuring Report (Weekly)
SOME OF OUR RECENT WINS
- Body Central defaults on debt, to explore options
- Corinthian Colleges subsidiary closes, files for BIA
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In The Deal, restructuring professionals can find Out-of-Court Debt Structures and Out-of-Court Financings, including amount, type of debt or structure, seniority, position, fees and pricing.
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Read below for a story straight from the Out-of-Court Restructuring Report written by one of our senior journalists:
Nonprofit colleges take up a new subject: Default
Moody's Investors Service Inc. has never seen any of the colleges it rates default on their debt. Only two nonprofit colleges rated by Standard & Poor's have defaulted in the past dozen years.
But a new normal is coming. Financial troubles are afflicting nonprofit colleges that have a liberal arts focus, have a single-sex student body, have outdated programs and facilities, or are in rural locations, according to Joseph D'Angelo, a partner at crisis management firm Carl Marks Advisors.
Nonprofit schools such as Sweet Briar College in Sweet Briar, Va., Dowling College in Oakdale, N.Y., Franklin Pierce University in Rindge, N.H., Ashland University in Ashland, Ohio, Alabama State University in Montgomery, Ala., Mills College in Oakland, Calif., and even the University of Puerto Rico all face an uncertain future when it comes to default. And they aren't alone.
"Higher education institutions were almost shielded from reality," said Greg Charleston, a senior managing director at crisis management firm Conway MacKenzie Inc. "I expect we will see more defaults in the next five years because of the change in what consumers are willing to pay for higher education."
Major financial woes have already beset the for-profit college sector, of course. Two of them, Corinthian Colleges Inc. and ATI Enterprises Inc., have both filed for bankruptcy protection and liquidated. Others, such as Education Management Corp., have either restructured out-of-court or are currently doing so.
But nonprofit colleges have heretofore been pretty resilient.
According to S&P senior director, Jessica Matsumori, among the nonprofit colleges the firm has rated in the past dozen years, only Haverhill, Mass-based Bradford College defaulted and closed its doors in 2000 and San Diego-based Thomas Jefferson School of Law defaulted on its bonds in June 2014.
Thomas Jefferson School of Law revealed in October that its financial situation became untenable during the Great Recession when its new building was worth less than the money it borrowed to pay for it. At the same time, there was a national shrinking of the law school applicant pool, resulting in a decline in the school's income.
The college had started earnest debt restructuring discussions in April 2014 but missed a payment over the summer. On Oct. 29, the school signed a restructuring support agreement with nearly 90% of its bondholders that reduced its debt by two-thirds and reduced its annual cash flow obligations by half. The agreement also ensured that Thomas Jefferson School of Law would be able to continue its operations at its campus in San Diego, according to a statement from the school.
Thomas Jefferson School of Law had raised $127 million by issuing bonds that were priced above 11% that it used to build its state-of-the-art building in San Diego in 2008. Through the restructuring, the bondholders took a big haircut, and the school was able to cut its debt by $87 million. The bondholders received $40 million in new bonds priced at 2% and became owners of the new building, and leased it back to the school for up to 10 years for $5 million in annual rent.
The Thomas Jefferson School of Law situation isn't likely to be an aberration, either. Schools often take on debt to build new buildings or improve their campuses. And public ones can take on more because they get aid from the states they're in.
According to Edith Behr, a Moody's vice president and senior credit officer, the median of outstanding debt for public universities for fiscal year 2013 was $237 million, while the median of outstanding debt for private universities for fiscal year 2013 was $106 million. Compare that to fiscal 2002, when those figures were $101.2 million and $104.9 million, respectively.
Behr said that there is a small portion of Moody's nonprofit college ratings portfolio -roughly 20%-that is weakening. These schools are having a hard time maintaining and increasing their revenues and enrollments. She said that these schools also have fixed costs that can't be reduced, such as tenured faculty and debt service requirements.
But college enrollment trends are flat or down "at the same time that you have many institutions that incurred sizable debt over the last 10 to 15 years for new facilities in order to compete for students," according to Jonathan D. Tarnow, a partner in Drinker Biddle & Reath LLP's education law practice. "At the moment, everyone is competing for a smaller number of college students."
As a result, the calculus no longer adds up.
"As with any budget, if your revenue stream isn't what you predicted to service your debt obligations and you can't lower expenses, you could end up having a liquidity problem," he added.
Families and students are reconsidering the costs of higher education and more carefully considering the return on that investment, and where to make it, Tarnow said.
That mindset represents a sea change. Borrowing had become a given when it came to a college education, and school administrators got used to that thinking.
"They had an everlasting ability to raise the tuition rate, as most students pay tuition through student loans," asserted Conway's Charleston, who noted that the formula where students borrow money, get a job and pay their student debt back worked for many years. "In the last five years, that formula doesn't seem to be working as well."
Charleston said people are weighing the cost of education against the kind of salary they can command upon graduation, putting pressure on schools when it comes to what they can now charge.
Many schools are already seeking ways to cut costs, taking steps such as freezing positions, offering early retirement incentives to reduce their workforces or by cutting their nonfaculty staff down.
"It's not one size fits all," noted S&P's Matsumori about the various paths nonprofit colleges are taking.
Carl Marks' D'Angelo suggests that those schools have also started to become more innovative in their restructurings-or have to begin to.
He said that some schools need to cut programs that aren't sustainable anymore and noted that some schools have created joint ventures to consolidate their back office functions. He also said that schools have to differentiate themselves by doing things like having programs that let students study abroad or take classes at another school nearby, adding that it's vital for colleges to embrace the Internet for education delivery to today's millennials.
Schools have had to offer more scholarships to attract more and better students, but offering discounts to students means a decrease in revenues, and on top of already declining enrollments, operating deficits threaten to become unsustainable, D'Angelo said.
Historically black colleges and universities, known as HBCUs, are struggling, in part, because of federal reductions to Title IV, which is financial aid from the federal government in the form of Pell Grants and other programs. Pell Grant programs have been shortened to six years from eight years and Parent PLUS loans have also been reduced significantly, D'Angelo asserted.
But as for-profit colleges have already discovered, Title IV funds aren't available for schools that file for bankruptcy. As a result, a vital debt restructuring tool is off-limits for nonprofit colleges.
"There are a number of nonprofit schools facing difficulty, for a host of reasons, that is causing them to look at different restructuring options," according to Dennis Cariello, a shareholder at Chicago law firm Hogan Marren Babbo & Rose Ltd., who has been involved in various restructurings in the education space. "The lack of a bankruptcy remedy has greatly affected the capital markets in higher education, particularly as it relates to obtaining bank debt. With bankruptcy, there is an orderly process to resolve things when an institution can't meet its obligations. Without that remedy, debtholders don't have a clear exit strategy when things go bad."
Most colleges and universities do have endowments, which are gifts from donors that are invested, to rely on. The earnings from the endowments can be used for various purposes, including operations.
"It can look like a school won't be able to continue its operations, but then someone comes along and saves the school year, after year, after year, after year," Moody's Behr said.