Did you miss a debt covenant? Welp...it happens.
Debt agreements are laden with financial benchmarks that need to be met on an annual basis. Covenants such as days cash on hand and debt service coverage ratio are the two most important covenants that are measured at least once a year. But, what happens if your school does not meet a debt covenant?
The first step is to get a game plan developed. Gather the school leadership, board members, and your finance consultants to gain an understanding of what will be required of the school. The game plan should include 1) a concrete understanding of why the covenant was not met; 2) a clear indication if the covenants will be met during the current fiscal year; 3) an updated financial forecast reflecting accurate projections of the financial performance and calculations of the debt covenants; 4) a coordinated plan to communicate with the trustee, investors, and bond broker/banker to walk through the complete game plan. There is no avoiding uncomfortable conversations as the school heads towards an investor call to discuss the situation.
If the game plan is well thought out and communicated effectively you stand a good chance that the magical waiver will be granted for the missed covenants. Said differently, if you have your act together the investors may give your school a pass on the missed covenants.
Alternatively, if you passively assume all will be fine without proactively preparing for the inventible investor call you may be in for a surprise. Most debt agreements allow for the investors to require the school hire an independent consultant to dig into the school's academics, operations, and finances. This process will be at the school's expense and will result in recommendations the school must act upon.
If you find your school in this situation TAG's Distressed Debt Services will be valuable in navigating through this process. Experience counts in this area. TAG has successfully managed this process for numerous schools in the past. If you find your school in need of this support don't hesitate to reach out to TAG.
Thank you for your time.
Mike Pocrnich, CPA
Managing Director - TAG