Law Schools, Money

'Little Prospect For Recovery' For Troubled Law School Whose Credit Rating Took A Major Nosedive

Will the school die in debt like its namesake?

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Early last week, we broke the news that the Thomas Jefferson School of Law had missed a payment on its revenue bonds, triggering a default event under its current Loan Agreement. Luckily for the school, it was able to strike a deal with its bondholders to delay the unseemly business of ceasing its operations, at least until October 17, 2014. In the interim, TJSL is discussing “various potential structures and restructuring alternatives” with its bondholders, and is “confident” that it will be able to reach an accord in the near future.

When we last checked in with this overly optimistic law school, TJSL was hoping that it would be able to “continue to prosper” after settling up with its creditors. But how is the law school supposed to reach this happy fate when its credit rating with Standard & Poor’s keeps getting downgraded lower and lower?

Perhaps it’s time for Thomas Jefferson Law to remove its rose-colored glasses and embrace the fact that it shares the same financial woes as its own namesake. Will the school die in debt like our former president?

Standard & Poor’s caught wind of the fact that the Thomas Jefferson School of Law had missed payments on its bonds and then failed to make payment in full shortly after we published our story here at Above the Law. The financial services company was not pleased, and proceeded to lower the law school’s rating to an embarrassing degree. Here’s some additional information from S&P (reg. req.) (gavel bang: TaxProf Blog):

Standard & Poor’s Ratings Services lowered its long-term rating to ‘CC’ from ‘B+’ on the California Statewide Communities Development Authority’s series 2008A tax-exempt revenue bonds and series 2008B taxable revenue bonds issued for Thomas Jefferson School of Law (TJSL). At the same time, Standard & Poor’s placed the rating on CreditWatch with negative implications.

“The rating action reflects our view of TJSL’s failure to make payments in full to the trustee of its June 26 loan payment, which secures the series 2008 bonds, and our anticipation that it will not make its Sept. 26 loan payment in full either,” said Standard & Poor’s credit analyst Carlotta Mills. We understand the school has made partial payments toward debt service, though we were unable to confirm from the trustee or the school if the debt service reserve has been drawn upon to pay bondholders.

“The CreditWatch designation reflects our understanding that the school has had multiple forbearance agreements with its bondholders and that it is working toward a restructuring of the debt, due to be in place by Oct. 17,” continued Ms. Mills. We expect that the bonds will default once the restructuring is completed.

This development certainly does not bode well for “ensur[ing] the school’s long term success.” To make matters worse, per the latest Consent and Forbearance Agreement — the tenth such Agreement made since August 2012 — while the law school still pledges that it will “work in good faith to diligently negotiate a reasonable restructuring of its obligations,” the document now contains the following foreboding language:

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How does the law school expect to “remain in operation and prosper” when it’s considering giving up ownership of its brand new building — the one where it “provide[s] the educational experience required of an ABA accredited school — to satisfy its debts? If you’re a student at TJSL and you’re interested in continuing your education there, perhaps this is a question you should be asking of the dean.

Now that S&P has had a say in this affair, we believe that the outlook for the future of TJSL has been “correctly describe[d]”: default imminent with little prospect for recovery, with negative implications.

(Flip to the next page to see TJSL’s latest Consent and Forbearance Agreement.)

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