Averett University is hoping investors will relax the rules on its bonds that have been in technical default since the beginning of the year.
The university took out nearly $15 million in bonds in 2017 to pay off old debts and to renovate campus buildings. As of June 2024, about $13.3 million remained on the balance to be paid through 2047.
The university discovered a budget deficit of more than $9 million in spring 2024, caused by what it has described as unauthorized withdrawals from its endowment to cover expenses. Averett has rapidly cut costs in an effort to stabilize its finances.
Averett is current on payments on its bonds but is in default because it has violated its debt service coverage ratio, a calculation that shows a borrower’s ability to repay bonds.
Averett is required to maintain a ratio of 1.2. If the ratio falls below 1 for two consecutive years, the university is considered to be in default.
For the year ending June 2024, the ratio was -4.46. For the year ending June 2023, it was 1.08; for fiscal 2022, it was -3.1.
In a draft audit posted in late May, the university said it has asked for a waiver on that ratio requirement.
Without it, the bondholders could force the university to make payments more quickly, or even immediately.
“The University’s assets available are insufficient to satisfy current obligations if payment on the 2017 Bonds is accelerated,” the audit states.
No indication of acceleration, but threat remains
A debt service cover ratio works similarly to the calculations lenders perform when someone applies for a mortgage to buy a home, said Justin Marlowe, research professor at the University of Chicago Harris School of Public Policy, where he is the director of the Center for Municipal Finance.
The bank or other lender “wants to make certain that if you run into financial trouble, that you will have enough revenue coming in to cover all your basic needs … and make your mortgage payments,” he said. “It’s the same idea here.”
Averett’s draft audit for fiscal 2024 says there has been no indication from the bondholders or trustee that payment will be accelerated. But without a waiver, the threat of the payment schedule being sped up would remain until Averett’s finances improve, which would restore the ratio to positive territory.
“It’s very common for investors to exercise that call feature” to accelerate bond payments, Marlowe said.
In order to secure the waiver, Marlowe said the trustee typically goes back to the bondholders, which are usually some combination of individuals and institutional investors such as pension funds and insurance companies, for a vote on the matter.
It’s not common for bondholders to be willing to renegotiate debt service coverage requirements, he said. “A lot of bondholders aren’t going to do that. They buy these bonds with a particular kind of credit risk in mind,” Marlowe said, and if that risk increases, the investment they’ve made loses its appeal.
Averett may have a better chance of obtaining a temporary waiver because it has a pending lawsuit claiming that its financial struggles were due to mismanagement by a few select players, Marlowe said.
“We are working with the bond trustee to move this forward as quickly as possible,” President Thomas Powell said in a statement on June 13. University spokesperson Cassie Jones later added that Averett hopes to receive a response from bondholders by July 1.
Jones did not specify when the university asked for the waiver.
Challenges for higher ed, but bright spots for Averett
Twelve colleges violated parts of their bond or loan covenants in fiscal 2024, according to a report by S&P Global Ratings last June. In most cases, bondholders waived the covenant violations, but S&P downgraded ratings for about half the schools due to their overall financial challenges, according to a report from industry publication Higher Ed Dive.
Rating firms that assess credit risk have soured on the U.S. higher education sector in recent years, largely due to enrollment declines and the sunset of federal pandemic relief funds for colleges and universities. S&P Global Ratings issued a negative outlook for “highly regional, less-selective institutions that lack financial flexibility” for 2025.
The Trump administration’s efforts to overhaul higher education have further negatively impacted outlooks, as many institutions wait to find out how much their federal research funding will be reduced.
Notre Dame College, a private school in Ohio, closed in 2024. But its financial troubles live on in the form of two lawsuits: one from a bank for defaulting on about $20 million worth of bonds, and another from the state’s attorney general for using restricted endowment funds to pay its debts.
In Philadelphia, the now-shuttered University of the Arts auctioned off some of its property as part of its bankruptcy proceedings to repay creditors. The university had taken out about $50 million in municipal bonds.
In April, Limestone University in South Carolina announced it was closing after years of financial turmoil. In 2023, the small private school gutted its endowment by half to pay its bills, but still had loan debt of about $30 million when it closed.
Averett’s new president has been optimistic about the school’s odds of survival amid its financial challenges. The university’s situation differs from other school closure stories in a few key ways.
The university’s enrollment is a significant bright spot. Enrollment increased by about 5% from fall 2023 to fall 2024, according to data from the State Council of Higher Education for Virginia.
That steady enrollment means Averett is bringing in money. Revenue is on par with previous years, according to the draft 2024 audit and a report to bondholders showing its financial status through April 2025.
City has no obligation to keep Averett afloat
Averett’s bond situation is unique because Danville’s Industrial Development Authority serves as a conduit. The IDA issued the bonds on behalf of the university so it could fund its on-campus projects. This is typically done to support an organization that has a benefit to a community. It’s more common for a private university to borrow via a state entity rather than a local conduit, Marlowe said. “If you work through a conduit borrower, then you have, in effect, the blessing of that conduit borrower,” said Marlowe.
That raises the question of intervention if the bonds ever end up in financial default, Marlowe said. The IDA has no repayment responsibility, but there could be discussion about its moral obligation — whether it would back the university to bring it out of default.
“Danville is not on the hook, but we’ve definitely seen cases where the question has come up” about what sort of due diligence the conduit borrower did before agreeing to serve as one, Marlowe said. “Does the conduit borrower have a moral obligation to think about whether it should do something to try to step in and fix this problem?”
Danville City Manager Ken Larking said Monday that the IDA doesn’t have a moral obligation to step in. But the university has a significant place in Danville, especially as the city grows, he said. The presence of a four-year university is attractive to companies considering bringing their business to Danville or Pittsylvania County, he said.
Larking said the circumstances around the school’s issues differ from other institutions that have seen financial challenges, and he said he hopes Averett can weather them and come out stronger.
“It’s a community asset we all want to see successful,” he said.
