[Partial Retraction] Did Sweet Briar’s CFO Miss a Tiny (a.k.a. HUGE) Detail?

UPDATE:  I have retracted the first part of this article regarding a possible missed item.  The observation about the apparent $20 million drop in the endowment remains.

The whole reason I got involved in the effort to save Sweet Briar, and the reason this blog exists, is because the numbers have not made sense to me from the first day I looked at them.  After having stared at SBC’s financials for weeks on end, and repeatedly reading the recently released faculty meeting transcripts, I am starting to think Sweet Briar’s CFO, Scott Shank, missed something.

As I covered in my first article on Sweet Briar, the single biggest issue the college faces is the liquidity covenant default provision in the 2011 bond. The document adding the liquidity covenant was executed with an effective date of September 1, 2014:

Section 4.9 Liquidity Covenant. At the end of each fiscal year, the Borrower shall have a Liquidity Ratio of not less than 1.10:1.

“Liquidity Ratio” means, with respect to the Borrower, the ratio of (a) Liquid Assets to (b) Total Funded Debt.

“Liquid Assets” shall mean the sum of Borrower’s unrestricted cash and investments and temporarily restricted cash and investments as then recorded on Borrower’s balance sheet.

“Total Funded Debt” shall mean the sum of Borrower’s bonds payable and capital lease obligations as then recorded on Borrower’s balance sheet.

 

In English after doing the math:  The college has to have $27,271,853.11 in liquid assets, being composed of unrestricted and temporarily restricted assets (click here for definition), as of June 30 each year.

This is where things stop making any sense.

Here is a breakdown of the endowment:

So if we add in the cash on hand in the operating accounts, we get this for the liquid assets as defined above for June 30, 2014:

Now we have to try to square that number with Shank’s statements during the faculty meeting:

“So, when we were in the summer of ‘14…we got a liquidity trigger added to [the bond]…and, we knew based on what we had negotiated, that we had already passed the liquidity trigger for that year.”

Ok…so at the time they added the trigger, they had already passed it, meaning they had less than $27,271,853.11 in liquid assets as of the fiscal year end…when the liquid assets were listed at $43.79 million as of June 30 in the audited financial statements.

Yep.  You read that correctly.  There are no typos. You will probably read it about three more times just so you are sure you understand this: He said they had already passed the trigger, which is measured as of June 30 each year…when they had $43.7 million in liquid assets.   Ok, let’s give him the benefit of the doubt and assume he meant they had already passed the trigger as of the effective date of the agreement, September 1, 2014. The only problem with that is you have to assume they spent more than $16.5 million in the 62 days between July 1 and September 1.

Anyone see any problems with the assumption that they spent more than $8.25 million a month for July and August…when fall tuition and room and board is rolling in, along with some grant money?

So how on earth could Shank conclude they had passed the trigger?  Did he miss the phrase “Temporarily Restricted” when figuring how much they had?  If you figure they had regular operating costs and payments of principal and interest on the bonds through July and August, the unrestricted funds of $28.6 million as of june 30, 2014 would have fallen below the $27.78 million trigger point, assuming you didn’t deposit any of the tuition payments that were rolling in since tuition was due by Aug 1.

UPDATE: It has been pointed out that this could be an interpretation issue.  “Passed” could be read as “we had gone past that point” or “we passed the test”.  I will continue to dig.  Either way, the following is still of interest:

What is far more disturbing though is when you add up the numbers given in the faculty meeting and bump them against the audited financials:

It only costs $35 million a year to operate the college.  How was the endowment down $20 million by December? Inquiring minds want to know…

Stay tuned for more on this…