BRADENTON, Fla. - More than a week after Louisiana State University scrubbed a $114.5 million bond offering when major investors pulled out amid budget concerns, the state's flagship university continues to explain its financial situation.
LSU is a victim of its own actions and headline risk, according municipal market experts.
"National media continue to erroneously report that LSU is considering 'bankruptcy,' which is not the case nor has it been part of any discussion between LSU President F. King Alexander and the LSU Board of Supervisors," the university said in a statement Wednesday night.
"LSU has been forthright in stating that there are many possible scenarios, with a declaration of financial exigency being a worst case option, to deal with possible [state] budget reductions," the statement said.
Louisiana faces a $1.6 billion budget deficit. Since 2009, the state has reduced appropriations to higher education institutions each year and there could be additional cuts in fiscal 2016.
The idea that LSU might consider filing for financial exigency surfaced in comments Alexander made in local newspapers on April 22 - the day LSU priced the $114.5 million transaction that was cancelled two days later when investors withdrew from the deal.
Since then, local and national publications have called financial exigency a euphemism for "academic bankruptcy."
"It was a huge blunder by the school," said Matt Fabian, a partner and head of market and credit research at Municipal Market Analytics. "This is what happens when an issuer isn't taking its responsibility vis-à-vis the bond market seriously enough, which should generally undermine trust in the statements the school continues to make."
Financial exigency is a term of art in higher education that allows colleges and universities to take into account the impact of financial strain on tenured faculty.
The University of Louisiana System - which does not oversee LSU -- allows the nine institutions under its purview to use a financial exigency declaration when finances are insufficient to support existing programs. The declaration allows programs to be cut, and faculty and employees to be laid off.
The ULS rule authorizing the use of financial exigency does not mention bankruptcy.
"Academic bankruptcy" is an inaccurate term but one often used to describe the severity of declaring financial exigency, said Sandra Woodley, president of the University of Louisiana System and a former chief financial officer.
"We certainly hope none of our institutions will need to use these measures, but the parameters are in place," Woodley said.
The experience encountered by issuers in the media can exemplify the impact of headline risk, said Tom Kozlik, managing director and municipal credit analyst at Janney Capital Markets.
"Misunderstandings about the credit conditions of municipal market issuers occur sometimes out of carelessness, sometimes due to inexpert advice, sometimes because of ignorance, and other times because individuals want to drum up attention for themselves," Kozlik said.
LSU is a component unit of the state that is not part of the ULS system.
The fact that an LSU official said in the media that the university is considering a financial exigency declaration as an option to deal with budget problems raised questions about whether investors were properly informed in the preliminary official statement for the April 22 bond issue.
The POS explains state budget problems in detail, including uncertainties for the university related to the fiscal 2016 budget.
"The university will examine all possible options to address potential reductions to state appropriations in FY 2015-16. This task will be a work-in-progress over the next several months," the POS said. It does not mention the possibility of a financial exigency declaration.
The fact that market participants were surprised by the news and pulled out of the deal "strongly implies" that LSU did not do enough to disclose issues of concern to investors, Fabian said.
"The market will eventually get smart enough to understand that financial exigency is not bankruptcy, but the trust issue may be longer to repair," he said.
