Averett University is in default on more than $14.6 million in bonds it took out to finance construction on campus, according to a notice from U.S. Bank dated Jan. 3.
Averett is not behind on its bond payments, according to the notice. However, the private university’s debt service coverage ratio has fallen below an acceptable threshold, and it has not provided proof that it maintains required insurance coverage, according to the U.S. Bank notice to bondholders, which was posted on the Municipal Securities Rulemaking Board website.
The debt service coverage ratio is a formula used to determine whether a borrower has sufficient cash flow to cover its debts.
If the issues don’t get resolved within a few months, Averett could be forced to pay back the bonds more quickly than originally planned. The Danville university is already facing financial constraints that have resulted in temporary staff furloughs and the elimination of the employee retirement savings match program.
In fiscal year 2023, Averett paid $290,000 toward its bonds, according to its most recent audit.
U.S. Bank is the trustee that enforces the terms of the loan agreement on behalf of the bondholders.
The bank’s notice says that there are no current plans to accelerate the repayment schedule. Averett’s bond agreement specifies that the trustee can require that the bonds be immediately paid back in the event of a default. The notice states that the university was given 30 days’ notice to remedy the issues prior to the January notice but didn’t do so.
Averett spokesperson Cassie Jones said by email Monday the university confirmed to U.S. Bank in November that its insurance policies are current and submitted the necessary documentation.
Jones did not respond to additional questions about the notice from U.S. Bank and declined a Cardinal News request to speak with someone at the university who could talk about the bonds and associated financial reporting requirements.
She referred questions to attorney Calvin “Woody” Fowler of Williams Mullin, who represents Averett University. Asked about documentation Averett provided to prove that its insurance coverage was still in effect and about the status of the debt service coverage ratio, he said by email that neither he nor the university could comment.
U.S. Bank declined to comment.
Averett took out bonds totaling about $15 million in December 2017 to be used for two purposes. The first was to pay off 2010 bonds that were used primarily to finance the construction and renovation of buildings on campus.
The second was to finance new renovations and expansions of student housing. The latter, known as “The New Project,” included a major renovation of Main Hall to increase student housing capacity and modernize existing housing. It also included renovations to Danville, Davenport, Bishop and Fugate Halls.
Fugate Hall was renovated in 2018 and 2019, and the Main Hall renovation was completed in 2019.
The bond covenant agreement requires the university to maintain a debt service coverage ratio of 1.20. This ratio signifies whether the university has enough money to repay its debts; a ratio below 1 signifies negative cash flow.
The bond agreement from 2017 states that the bonds will enter default status if the debt service coverage ratio drops below 1 for two consecutive fiscal years. U.S. Bank’s notice did not specify what Averett’s current ratio is.
The agreement also requires that the university maintain insurance on its property and operations.
Averett is trying to recover from financial mismanagement it says occurred over the course of about a year before it was discovered in spring 2024. In July, Jones said by email that spending decisions had been made using incorrect data, which resulted “in living beyond our means without realizing it at the time.” COVID-19 subsidies “helped mask broader issues” at the university, Jones said, and once the pandemic funding “dried up,” Averett didn’t adjust its finances enough to sync up its spending and revenues.
Longtime Averett President Tiffany Franks announced her retirement in December. This month, David Joyce joined the university as its new president.
Rob Warren, assistant professor of accounting at Radford University, said many colleges are feeling a post-pandemic cash crunch. He said COVID relief funding increased liquidity for many colleges and universities. Now that the funding has expired, some schools are still making adjustments to balance their budgets.
Warren said failing to meet requirements for a university’s bond debt is a significant sign of financial instability.
In January 2024, Bradley University in Illinois violated its bond covenant agreement when its debt service coverage ratio fell below 1. The bank did not call in the $17 million debt but set new bond terms including an interest rate hike and a more stringent debt service coverage ratio, according to local reporting by WCBU.
Averett’s bonds are scheduled to be paid back through October 2047. The Industrial Development Authority of Danville issued the bonds but served only as a conduit, according to Danville City Manager Ken Larking. By email, Larking said that no repayment funds flow through the IDA.
Averett must also submit an annual report and audited financial statements as part of its bond requirements and has not yet done so for 2024. In a letter dated Dec. 1 posted to the MSRB, interim chief financial officer Donald Merricks said the university intends to submit those financial reports to U.S. Bank by the end of February.
The university’s latest tax filing and audit available are for the fiscal year ending June 2023. At that time, Averett had nearly $21 million in debt. The audit noted about $1.3 million cash on hand at that time.
