Investors who bought $114 million of debt sold by LSU on Wednesday were warned about the state’s fiscal struggles, in which lawmakers are working to fill a $1.6 billion budget hole for the coming fiscal year. But Bloomberg reports that what they weren’t explicitly told in bond offering documents was that the school was considering filing for exigency.
LSU President F. King Alexander announced on Wednesday morning that university officials “have decided to begin contingency planning for exigency”—equivalent to college bankruptcy—in the wake of $608 million in budget cuts proposed by Gov. Bobby Jindal. For those who analyzed offering documents, the first item listed under bondholders’ risks now takes on added meaning.
“The ability of the university to make principal and interest payments on the series 2015 bonds is indirectly contingent upon sufficient annual state appropriations to continue the operations of the university,” it reads.
Yet the word “exigency” doesn’t appear in the 204-page document, which is dated April 13, or more than a week prior to Alexander’s statement to the media on the exigency plans. Exigency, declared when schools face insolvency, would allow Louisiana’s flagship school to restructure and fire tenured faculty.
“It’s bad form, if nothing else,” Bart Mosley, co-president of Trident Municipal Research in New York, tells Bloomberg. “Obviously for LSU’s financial structure, the state budgeting situation is a risk factor. The question this is going to come down to is how well were potential bond purchasers informed.”
LSU spokesman Ernie Ballard tells Bloomberg in an email: “We didn’t list every possible action/contingency that might ultimately be considered because the situation was and remains fluid due to the ongoing legislative process, as it is in many other states. We are confident that we were transparent and open in the offering statement about the current state budget situation to potential investors.”
The school “is exploring a wide range of contingency plans, one of which would be filing for exigency if solutions to the projected shortfall are not found,” Ballard says.
The bond document says “the university will examine all possible options to address potential reductions to state appropriations” in fiscal 2015-16.
The bond deal shrank from an initially planned $130 million, according to offering documents. The largest portion of debt matures in July 2045 and is priced to yield 3.57%, or about 0.5 of a percentage point above benchmark munis, data compiled by Bloomberg show.
Moody’s Investors Service rates the university A1, the fifth-highest grade. It lowered its outlook to stable from positive on April 8, citing “material declines” in state support. Fitch Ratings ranks it a step higher, at AA-.
