Non-Profit
Community Center
Situation
- Donations and returns on investments in endowments (primary source of repayment) had fallen significantly below projections.
- 10 donors accounted for more than 90% of the capital raising capacity.
- Incurred debt to build/refurbish facilities with plan for continued donations and investments in endowments.
- Slowing economy resulted in a declining trend that underachieved projections for operating revenues, donations, and loss of principal endowments; the decline in interest rates resulted in lower returns on remaining investments.
- Senior lender filed lawsuit after default on payment and unsuccessful attempts to discuss restructuring the debt.
- Structure of debt was multi-faceted: line of credit, bonds, interest rate swap agreement and letter of credit.
- The lender conditioned any standstill upon the organization engaging a financial consultant.
Consultant's Actions
- Ensured management was teamed with financial, legal, and public relations advisors to consider all options.
- Ensured restricted assets were appropriately and distinctly separated from unrestricted assets.
- Developed long-term cash flow forecast to illustrate feasibility of options with management, key donors, and lender. In each scenario, ensured all stakeholders were identified and roles/impact were considered.
- Led negotiations with the lender, obtained stand-still on litigation while negotiations continued in good faith.
- Provided assessment of the situation along with options and recommendations for attainable solutions.
- Ensured the Board was informed, and major donors were actively engaged in exploration of scenarios.
Outcome
- All of the facilities and services continued uninterrupted during this process.
- Devised an out-of-court resolution that provided for replacement capital, allowing the lender to exit.
- The lender recovered $45 million of $58 million, significantly above valuation.
- The organization paid the majority of settlement in cash sourced from a combination of a fundraising campaign and a loan from a new banking relationship.
School
Situation
- Donations and returns on investments in endowments fell significantly below projections.
- Alumni donor base primarily comprised of relatively small dollar contributors – very few “wealthy name” donors.
- Incurred debt to build/refurbish facilities with plan for continued donations and investments in endowments.
- A declining enrollment that underachieved projections for operating revenues and donations; the organization was slow to adjust its cost structure.
- The debt was multi-faceted: line of credit, bonds, swap agreement, and letter of credit.
- The organization defaulted on swap obligation; the senior lenders backing a letter of credit decided to not renew.
- A change in the organization’s management divided alumni/donors into two factions.
- Public awareness of the situation would have a long-lasting negative impact on enrollment.
- The lender engaged a financial consultant to assess and advise on offers and options.
Consultant's Actions
- Worked cooperatively with the borrower in reviewing cost cutting and its long-term plan for replacement of teaching faculty.
- Assessed five-year cash flow forecast for feasibility.
- Discussed concepts to divest idle assets and realigned capex expenditures to align with donor-based initiatives.
- Developed and presented an independent assessment of the situation along with options and recommendations for attainable solutions.
- Validated that the school's board was informed, and the school's major donors were actively engaged in exploration of scenarios.
Outcome
- An out-of-court resolution comprised of replacement financing plus a discrete capital campaign allowed the bank group an acceptable exit.
- All of the core facilities and services continued uninterrupted during this process.
- Avoided public awareness of the situation.
- Enrollment not impacted by the events.
