Thomas Jefferson's Agreement with Bondholders

A reader has sent along this important news on Thomas Jefferson Law School's agreement regarding its obligations with its Bondholders.  Cribbing now from the story:

[T]he bonds will be cancelled. In exchange, the bondholders will become owners of the building and lease it back to the school. In addition, the bondholders will also receive $40 million in new notes at an interest rate of 2 percent. Interest rates on the previous outstanding taxable bonds were over 11 percent, with non-taxable bonds at over 7 percent.

The agreement cuts the school’s debt by nearly $87 million, from $127 million to $40 million, and results in a significant improvement in cash flow. Previously, the school was paying about $12 million a year in principal and interest on its debt. Under the restructuring, the school will pay $5 million in annual rent and about $1 million a year in interest expense, cutting its annual payments to the bondholders by almost 50 percent to a total of $6 million.

 This looks like an important victory for Thomas Jefferson.

Update: As "Confused by your post" points out, the documents related to this are available on-line.

Comments

[Former Editor]

Well done Dean Guernsey. The school might not fail now.

[JPQ]

So they sold a building for $87 million. I would guess before long they won't be able to pay their rent and will move back into cheaper space, and the building will be rented out to some growing business. The bondholders won't see much of their remaining $40 million, I would wager, but if they can rent the space at a premium they might be able to make a profit on the whole deal.

[confused by your post]

Wow! I'm going to ask Dean Guernsey to negotiate me a raise with the firm at the end of the year. Bondholders get the building, $1M in annual rent and $40M in new bonds at 2% interest. Guess the bondholders were convinced they were screwed. They faced the alternative of trying to evict TJLS and then finding a tenant to lease a purpose built law school facility (better luck finding a unicorn). Bet those bondholders regret buying those bonds!

Bravo TJLS. Even when you lose you win. Looking forward to hearing more details of the Restructuring Support Agreement in the future.

Great job in finding and posting this Prof. Brophy.

[anon]

You can only sell the farm once.

Anybody here ever play Monopoly?

Do you all really believe that the "bondholders" got the short end here?

From what I quickly read, in 2008, TJ borrowed the $127 million in bonds to build its building. It has been paying 11% (taxable) and 7% (nontaxable) interest on those bonds ever since. (Is anyone out there aware of the bond market?)

Now, it has reduced its bond debt by “87 million” and is still indebted on 40 million in new bonds.

To be sure, TJ reduced its interest rate on the new issue, to 2%. Anyone ever here of refinancing? 11% was an outrageous windfall for the bondholders, and the fact that they received that rate for seven years is a testament to what, exactly? The acumen of TJ?

Now, what did TJ give up for the 87 million? The building it borrowed 127 million to build, seven years ago?

What is the building worth? 40 million less than TJ paid to build it? No tenant would occupy it? No investor purchase it for 87 million? Please. 273,544 sqft in the Central Business District of San Diego? All of you real estate experts out there: chime in!

Geez. Believing this was a great deal for the law school is almost as naïve as praising a law school Dean for the deal.

[Nathan A]

The school no longer owns its building and it still has $40M in debt. This is only a victory in the sense that TJSL can continue to operate.

[Former Editor]

Nathan A,

Which is, I'd say, a substantial victory. TJLS is probably no longer the front-runner for first ABA law school to go under.

anon 3:30

I'm not saying TJLS is in good shape here, but its in much better shape than it was six months ago. Guernsey (who was not in charge when they foolishly borrowed to build) deserves some credit for staunching the wound.

[anon]

FE

I doubt the Dean had any real role in this: TJ undoubtedly was represented by counsel, who used appropriate experts, etc. If the Dean actually negotiated and effected this deal, one hopes he has some significant e and o insurance!

Selling the farm for a pittance is called capitulation to stave off default. That isn't a victory is any sense.

The bondholders have the building that they lent their money to build. But, in addition, they have TJ on the hook for another 40M. Seriously, do you think if the law school limps along for another few years that will make this a victory?

Please provide us with the basis for your opinion that the law school is financially sound. Let's start with: what are its operating expenses, and what is its expected revenue at current rates of enrollment?

[PaulB]

Looks like TJSL lives for another day. What the story doesn't mention is how long their lease is good for. It's very possible that the bondholders agreed to a short term (say 5 years or less) lease that will provide them with cash flow while they look to repurpose the building.

[confused by your post]

High interest rates on TJLS bonds were a simple reflection of the default risk. Refinancing at a lower rate was obviously not possible. This was due to TJLS's terrible financial situation combined with the low value of the loan collateral (the law school building).

Based upon what we know so far, this settlement is a huge win for TJLS and a huge loss for bondholders. The building was reported to cost $90M to construct and is apparently riddled with construction defects. There appears to be almost nothing else of value for the bondholders to recover against. The building was purpose built for use as a law school. The building's value is greatly diminished because of this. It will need to be marketed and repurposed which takes a while. The fact that the building is currently used by occupants who may not cooperate in leaving plus lengthy anticipated holding costs before the property can be used again further diminish its value.

My wild guess is that the building would go under contract with a buyer for $40-$50M if it had to be sold quickly now. More if the bondholders wait a while and plan for the orderly sale of the building. That is undoubtedly their plan.

One question I have is how long is TJLS's $1M a year lease? If it's long term that's an even bigger win for LJLS.

[anon123]

The lease goes for 10 years. http://www.tjsl.edu/news-media/2014/12735

What is not said, is how much space TJ will take. The school indicates 204 students entering in Fall 2014 (versus 387 in Fall 2012). I am not certain how easy it would be to convert the larger classrooms to office or other uses, but I suspect that TJ will not end up with as much space as it has now. Not saying this is a bad deal, just that the devil may be in the details.

[anon]

See, the San Diego Reader, "Curtains for Thomas Jefferson School of Law? Two magazines question debt-plagued institution's viability" By Don Bauder, Oct. 14, 2014

Victory!!!

[anon]

CBYP

At least you admit you are wildly guessing.

Par for the course, here in the FL.

[anon123]

The lease (at $5M per year) goes for 10 years, which together with the $1M of interest is about half what they were paying. What is not being said is how much space does TJ get for that rent. They are saying they have 204 students for Fall of 2014 (before any public notice of default), versus 387 for Fall of 2012. My guess is the building was planned on the basis of close to double the enrollment they now have. I am not certain how the stadium classrooms could be configured for office or other space, but I do suspect that TJ will not be renting the entire building.

[confused by your post]

Right you are anon123. Thanks for correcting me on getting the rent number wrong. TJLS's website says the lease is for "up to ten years."

More related info from TJSL's website:

http://www.tjsl.edu/news-media/2014/12735

[Barry]

" In addition, the bondholders will also receive $40 million in new notes at an interest rate of 2 percent."

I wish I could get a mortgage at 2%

[confused by your post]

I just found the signed docs related to the settlment on-line. A lot to go through. Shocked that they are publicly available.

emma.msrb.org is your friend if you know how to dig.

[confused by your post]

Answered my question about the length of TJSL's lease. Landlord may opt to have it expire as soon as Aug.1, 2017 by giving at least 12 months prior written notice to TJSL! If that happens Landlord has to finance TJSL's relocation costs up to $3M. If Landlord terminates the lease as of Aug.1, 2017 and Tenant is not in default of its obligations, then $20M of the $40M will be written off by the bondholders.

$40M new debt bears interest at 2% to be paid if there is cash available.Otherwise the interest accrues. In addition, TJLS pays 80% of its excess cash flow (if any) to pay down the new debt.Term is 17 years.

Plenty more to the deal than what I've posted, but I expect few are interested in all of the details.

[confused by your post]

Docs I found include an appraisal for the building done by CBRE. It states the As is value of the building if vacant is $38.5M.

[anon]

"confused by your post" . . . where is the CBRE appraisal? Can you give the website that has the report. I'm curious how TJ could have borrowed so much to build a building that is a fraction of the construction cost. The appraisal may be helpful to understand this.

[anon]

Calculate the interest earned on the 127 million since 2008 at 11% (or 7% taxable).

Add to that 40 million in new debt, secured by harsh payment terms.

Add to that a reported assignment of all of TJS's cash assets.

Add to that its shiny new building, which someone claims was built for 90 million just a few years ago, but claims is now worth less than half that amount.

Let's assume that there is an "appraisal" to that effect.

Even if that is true, a "victory" cry seems absurd.

First, what is the basis for any opinion that the law school is financially sound? Let's start with: what are its operating expenses, and what is its expected revenue at current rates of enrollment? Assume, for sake of discussion, that its debt service has been reduced by 6 million as a result of this deal. What are its revenues? Does anyone believe that 6 million a year was all that TJS needed to make a difference between financial health and bk?

Second, is TJS basically operating on open enrollment at this point, with dwindling enrollment? Does this suggest a financially sound enterprise?

Third, how are we to believe that real estate in the San Diego business district has so dramatically fallen in value (surely not because of any construction defect suit; such suits in CA are a part of doing business)? Did TJS spend 90 million or more to build a building worth less than half that amount? If folks are ready to applaud the TJS Dean for this deal, should we attribute the decision to supposedly throw away almost 50 million to his predecessor, or to the faculty?

Fourth, if TJ gets in a bind (as it just did) during the next few years, it is stated above that the bondholders will be able to terminate its lease with basically no penalty as early as 2017 (with 12 mos. notice, i.e., just enough time for the incoming class to graduate).

Why would the bondholders build in that prospect, and why would TJS want to impose such a harsh deterrent (assuming it stays current), if the building is so relatively worthless and undesirable? Wouldn't the bondholders want TJS operating as long as possible, if it is not in default, without terminating its lease, if the building is worth such a pittance?

Again, victory? What is there to crow about here? Is it unseemly to do so, especially when one considers the prospects for FT, LT, JD required employment for the graduates of this school?

In short, one cannot read a press release and issue pronouncements. This should be common sense, but, in the FL, it takes a lot of discussion to just get to the point where folks start admitting that they don't know anything about the subject under discussion.