LOS ANGELES — A San Diego law school plans to close on a debt restructuring agreement on Nov. 15 for a sale-leaseback of its building to reduce $127 million in outstanding debt by two-thirds and resolve a bond default.
Thomas Jefferson School of Law signed a restructuring agreement Oct. 28 with 90% of its bondholders that reduces the school's $127 million in outstanding debt to $40 million. The school will hand over the title of the building in a deed in lieu of foreclosure to bondholders and enter into a 10-year lease agreement. The original bonds will be defeased and replaced by $40 million in notes.
The small private law school, had warned in an April filing on the Municipal Securities Rulemaking Board's EMMA website that it would default on its October bond payment.
Although school officials had been in negotiations with bondholders, the pending default ratcheted up the process and negotiations began in earnest in April, said Thomas Guernsey, the law school's dean.
Guernsey, who was hired in July 2013 to turn the school around, said the bondholders agreed it was in the best interest of everyone involved for the school to remain open.
The restructuring gives the dean and his team running room to implement their strategy, said David Orlofsky of Zolfo Cooper, financial advisor to the bondholders.
"In the macro-environment of reduced U.S. law school enrollment, the debt needed to be restructured, and it was done in a way that benefits both the school and the bondholders," Orlofsky said. "We have confidence that Dean Guernsey and his team can continue to improve the school and its operating performance, which will be good for the school, the students, the faculty, the alumni and the bondholders."
Guernsey said when he was hired there was discussion that the 45-year-old law school could be the first ABA accredited law school to close.
The school's 2008 bonds, issued through the California Statewide Communities Development Authority shortly before the economic crash, were based on enrollment projections in a very different economic environment, Guernsey said. In the post-recession world, law firms have shrunk and the larger law firms are not hiring the cadres of associates fresh out of law school they once were. The result is reduced enrollment figures.
The school's enrollment of over 1,000 full-time students in 2008 has fallen by 27% to 676 for fall 2014, Guernsey said. Declining enrollment is anticipated through 2017, at which point numbers are projected to level off, he said.
The restructuring puts the school on solid financial footing as it is based on more realistic enrollment figures, Guernsey said.
Under the agreement the bonds will be defeased and $40 million in notes will be issued at a 2% interest rate. The agreement cuts in half the annual payments the school was making from $12 million to $6 million. The school had been paying taxable bond rates of more than 11% and tax-exempt rates over 7%. The school will now pay $5 million in annual rent and about $1 million a year in interest expense.
Standard & Poor's lowered its rating on the debt to D from CC on Nov. 6 and removed the rating from CreditWatch with negative implications.
According to S&P's criteria and rating definitions, an issue rating is lowered to D when payments on an obligation are not made on the date due, said S&P Analyst Carlotta Mills. Once the restructuring is complete, "we would withdraw the rating," she said.
The law school missed its June 26 and Sept. 26 loan payments and had multiple forbearance agreements with bondholders, according to the S&P report.
