Case Study December 2010



A three piece (A, B and C) bond loan was underwritten in 2007 totaling more that $33 million dollars for a non-profit school in Northern CA. The school never achieved its enrollment goals and new demographic studies suggested that it wouldn’t for at least 10 more years. Borrower defaulted on the obligations very early on in the transaction history. Two forbearance agreements were subsequently negotiated and eventually breached.


A new appraisal was conducted to establish values in the $13MM to $17MM range for the single purpose real estate asset. Negotiations with the senior lender included the prospect of Chapter 11 Bankruptcy cram down litigation. The lender quickly recognized that a prepackaged proceeding would be in its best interest to help the school become viable and eliminate unduly burdensome subordinate debt. These negotiations also produced almost 25% of write down on the senior debt.

With the cooperation of the senior lender, subordinated debt holders had to scramble quickly to assess their potential losses. $10MM of subordinate debt was eventually settled for NPV of less than $1MM payable over three years. Senior debt was trimmed by almost $6MM with interest only payments for 3 years. $1MM in new equity was contributed upon closing of the restructuring. The Chapter 11 filing was avoided as negotiations produced an inexpensive version of what might be accomplished in an actual proceeding.

More and more lenders are willing to negotiate bankruptcy scenarios to avoid the expense and time delays attributable to actual filings.