Saint Catharine’s College (“SCC” or the “College”) publicly announced its closure on June 2, 2016, citing as reasons ongoing disputes with the U.S. Department of Education over federal student aid reimbursements and inability to meet its debt obligations accumulated due to construction on the campus.  A large percentage of the College’s debt obligations came in the form of bonds underwritten and sold by Ross, Sinclaire & Associates, LLC in 2004, 2008, 2011 and 2014.  These bonds were to be repaid almost exclusively from the revenues generated by SCC, so when the College closed, the bonds were in default. At that time (and today), there were roughly $24,265,000 face value of bonds outstanding, many owned by individual investors seeking safe investments and conservative income therefrom.  In addition to the bonded indebtedness, Farmers National Bank has a secured debt totaling $1.5 Million and there is an additional $4 Million of debt which is unsecured or the security is not certain.  See, Huntington National Bank, as Trustee, v. Saint Catharine College, Inc., et al., United State District Court, Western District of Kentucky, No. 3:16-cv-465-DJH, Receivers’ First Report to the Court filed September 23, 2106 at page 12 [Docket No. 25].

Huntington National Bank (Trustee for all the outstanding bonds and bondholders) initiated a lawsuit against the College on July 19, 2017 to secure payment of a portion of the bonded indebtedness on behalf of the hundreds and perhaps thousands of bondholders left holding the defaulted bonds.  See, Huntington National Bank, as Trustee, v. Saint Catharine College, Inc., et al., United State District Court, Western District of Kentucky, No. 3:16-cv-465-DJH.  On July 26, 2016, the Court appointed LS Associates, LLC as Receiver in the case to, among other things, marshal and sell the assets of the College.  According to the Receiver’s 17th Report to the Court filed February 15, 2018, the Receiver has collected nearly $1,475,000 of cash through the sale of assets including, the College’s equipment, houses, vehicles and other receivables.  But for whose benefit?  Over the same period, expenditures have totaled over $1,500,000, which includes over $537,000 of fees to the Receiver and its lawyers and another $750,000 to maintain the campus (insurance, security, utilities, etc.).  So where to the bondholders stand?

The primary asset of SCC is its 100-acre campus and the library, classroom buildings, student center and dormitories erected thereon.  So what are those properties worth, and more importantly, what if any of that amount will be distributed to the bondholders?  Let’s try to figure that out.  On November 1, 2017, the Receiver (as Seller) contracted with Runchero Corporation, Inc. (the “Purchaser”) for the purchase and sale of substantially all of SCC’s remaining assets, including the real property comprising its campus, for $4.7 Million. Among other things, the Purchase Agreement required a closing no later than 31 days following entry by the Court of an order authoring the closing of the transaction – which was entered on February 6, 2018.   Entry of the Order on February 6, required a closing of the sale transaction by March 9, 2018. Immediately prior to the March 9th scheduled closing, the Purchaser informed Receiver that it was unable to provide sufficient funding to close the transaction.

Thereafter, the Purchaser and the Receiver negotiated a Cure Agreement which proposes to extend the closing date to June 4, 2018 in exchange for, among other things: (i) a non-refundable payment from the Purchaser in the amount of $470,000, which shall constitute a credit against the total purchase price at closing.  So, assuming the Court again approves the transaction and additional terms and the closing takes place on or before June 4, the Receiver will have collected for the Trustee about $4.7 Million in exchange for the remaining assets of SCC.

Simple math indicates that excluding the additional $5.5 Million of secured and/or unsecured debt, the best the bondholders could expect to receive for their bonds is about 19 cents on the dollar ($4,700,000 sales price divided by $24,265,000 of bonds outstanding).  If we add the other $1.5 Million of secured debt to the equation’s denominator, the bondholders stake drops to 18 cents on the dollar; and it fall to about $.16 if we consider all the debt.  But, not so fast.  What about real estate commissions payable to the two real estate brokers involved in the transaction (perhaps 6-10% of the total sales price), ongoing professional fees of the Receiver and lawyers involved with SCC and other related litigations, utilities, insurance and all the other ongoing fees of SCC?  Certainly, they will be significant; and whatever amounts they are, they will reduce the value of the bonds and any sales price or distributions available to the bondholders. 

Saint Catharines Bonds traded on March 2, 2018 (well after the announcement of the $4.7 Million sale and a week before the initial closing deadline) between $6.28 and $6.85 per bond.  See Cusip 85071QAU1 on the Electronic Municipal Market Access (“EMMA”).  On March 20, 2018, SCC bonds traded between $7.00 and $7.38.  These were fairly small $10,000 – $20,000 transactions which resulted in roughly six to eight cents on the dollar.  It does not look like the market is placing much value on the $4.7 Million sale of assets in light of the amount of debt outstanding and fees to be paid from the proceeds. 

If you have any questions about Saint Catharines Bonds, or any other investments in your portfolio, call us for a free consultation.     

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