SAN FRANCISCO — Windrush School, a 35-year-old private school located in the East Bay suburbs of San Francisco, filed for Chapter 11 protection in the U.S. Bankruptcy Court in Oakland last week when it couldn’t reach a forbearance agreement with bondholders on $13 million of bonds issued in 2007.
The K-8 nonprofit school in El Cerrito issued the revenue bonds in 2007 through the California Statewide Communities Development Authority to finance the addition of a middle school, expanding from a K-5 campus, said Enrico Hernandez, the school’s finance director.
Despite three years of market research before its expansion, Windrush’s enrollment dropped to 165 students from a peak of 255, causing it to experience revenue shortfalls after the economic downturn in 2008, Hernandez said. Up to 90% of the $5 million annual budget comes from the $20,000 each student pays for tuition, so even slight declines in enrollment impact the revenue stream, he said.
Windrush notified Wells Fargo, the bond trustee, in June that it would not be able to make its July 1 interest payment of $357,500, according to a disclosure filing posted on the Municipal Securities Rulemaking Board’s EMMA website.
In the filing, bondholders appeared willing to work with Windrush to come up with a forbearance plan. The July 5 filing stated: “The trustee does not have any plans to undertake any remedial action against the borrower during the forbearance period.”
But after two months of negotiations, bondholders and school officials were unable to agree on how to restructure the debt. On Aug. 30, Wells Fargo filed a breach of contract complaint against Windrush in Contra Costa County Superior Court.
“We cannot go into detail regarding customer communications on this matter, but it would be fair to say that no forbearance was agreed to because the school did not agree to our terms,” said an e-mail by Alan Elias, senior vice president and head of wholesale banking communications in Wells Fargo’s San Francisco office.
On Sept. 23, board members told parents that bondholders would not agree to a restructuring of the debt and the school would have to file bankruptcy. Officials also notified parents that if they could not raise $900,000 by the bankruptcy hearing on Oct. 7, the school would be closed.
“We need to get the money by the bankruptcy hearing, because in Chapter 11, you have to show the judge you will be able to function,” Hernandez said.
Officials have been able to raise about $550,000, a little over half of what’s needed to pay for operating costs through the school year, Hernandez said. Even if the school raises the money, it will not cover payments on the bonds, he said.
Stone & Youngberg LLC underwrote the unrated bonds, which were sold without credit enhancement, with trading limited to approved institutional buyers, according to the official statement.
The bonds, all 2037 term bonds, were priced at par at issuance, yielding 5.5%, according to EMMA; the last reported trade took place in April 2010, at 78 cents on the dollar. The bond trustee was granted a first lien on the school property.
Private schools like Windrush can have a tougher time in a weak economy because of their dependence on tuition as opposed to state funding, said Jim McManus, executive director of the California Association of Independent Schools. But the majority of its 200 member schools have been able to maintain the same level of services through belt-tightening measures.
He suspects that Windrush has been hit harder because of the micro-economy in the East Bay area where many people work in consulting or contract jobs. In some of the more affluent areas, like Silicon Valley, where employment remains more stable, private schools have even seen enrollment increase, McManus said.
“They experienced a perfect storm with the decision to build a new school in 2007 just before the economy crashed,” he said.