Struggling Wisconsin college turns to tender for restructuring

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Beloit College has purchased through a tender most of its publicly offered $23 million 2016 issue in a debt restructuring that follows the private Wisconsin school’s cut to junk last summer.

“The college is engaged in a broad effort to increase revenue and decrease expenses,” it said in the December notice of its tender offer. “Part of that effort is an evaluation of the college’s overall debt structure,” that includes the $23 million issue sold through the Wisconsin Health and Educational Facilities Authority and a $29.7 million direct placement with JPMorgan.

The college reported it would use “cash on hand” and “funds held in the college’s endowment” to cover the purchase price plus interest costs. The college’s endowment was at $156 million as of October with $52 million unrestricted as of last June.

The college said the debt evaluation was triggered by several factors including the downgrade of its rating to Ba1 from Baa2 by Moody’s Investors Service in August. The downgrade did not trigger a default under the bond indenture, but it represented a default under the terms of the college’s continuing covenants agreement on the direct placement.

The likelihood that the college’s debt service coverage ratio on June 30 would fall below the minimum level requirements required by under the master trust indenture and the continuing covenant agreements on the 2014 direct placement also contributed to the decision.

Because those directly placed 2014 bonds are “subject to a hedging arrangement, among other factors, the college has determined that the best way to manage its debt service obligations is to acquire through a tender offer as many” of the 2016 bonds as possible and to cancel some or all of the bonds.

Beloit’s mounting strains were highlighted by Moody’s August report.

“The college's debt structure introduces material liquidity risk due to multiple financial covenants, which could result in acceleration of debt if tripped and not waived,” Moody’s wrote after downgrading the college and assigning a negative outlook.

The college's failure to meet the debt service coverage threshold in fiscal 2017 led to its engagement with an independent financial consultant as required by the covenants. Failure to comply with the bond covenants can lead to an acceleration of the principal and interest due at the request of at least 25% of bondholders.

The 2014 direct placement bond covenants also have a debt service coverage requirements and a liquidity ratio requiring unrestricted cash and investments of at least $35 million. JPMorgan provided a waiver for the violation of the debt service coverage covenant in fiscal 2017. Failure to comply with the bond's covenants or receive a waiver for a missed covenant can result in the acceleration of the outstanding principal and interest.

“The college has taken, and will continue to take, aggressive steps to increase revenue and decrease expenses, but the effort to ‘right size’ expenses to likely enrollment and revenue projections will take time,” the college said in an October notice telling bondholders it was exploring restructuring options.

The small liberal arts school in Beloit, about 50 miles south of Madison, generated about $51 million in revenue in fiscal 2017 and enrolled 1,350 students in the fall 2017 semester.

“The negative outlook incorporates the potential for additional credit deterioration should the college not be able to stem enrollment declines and right size operations over the next two years,” Moody’s said.

The college launched the tender on Dec. 17 and issued an early acceptance offer on Dec. 31 although the tender remained open until Jan. 16. JPMorgan was dealer manager for the tender that offered purchase prices between 100% and 106.5% of par. The final acceptance notice was published last week.

During the course of the tender, Beloit notified holders that it had received a default notice and reservation of rights from the lender on bridge loans to the college’s subsidiary Powerhouse LLC, although the lender did not take any action. That event was triggered due to covenant defaults on the 2014 direct placement bonds.

Powerhouse LLC is managing the school’s $38 million project to recommission the former Blackhawk power plant into a student union, recreation, and athletic center. Powerhouse entered into construction bridge loans totaling up to $20 million with Beloit serving as the guarantor. The loans are subordinate to the bonds.

The 2016 bonds that were the subject of the tender carried interest rates between 3% and 5%.

About $27.7 million of the direct placement bonds were outstanding as of last June. The bonds carry a three-year term with the annual option for a one-year renewal and interest is set at 72% of the London Interbank Offered Rate plus 100 basis points with the rate at 3.05 % last June.

The 2014 and 2016 bonds are secured by a pledge of revenues including student fees and tuition as well as a mortgage on campus property and facilities excluding the Powerhouse facility.

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Higher education bonds Secondary bond market Tender offers Wisconsin Health & Educational Facilities Authority Wisconsin