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Without an injection of cash, Laurentian wouldn't have made payroll this month

We took a deep dive into the court documents filed as part of local university’s ‘unprecedented’ CCAA filing
The Parker Building at Laurentian University. (File)

Absent the $25 million in relief funding sought in court filings, Laurentian University said it would have run out of cash to meet its payroll obligations by the end of this month.

This is according to publicly available court documents filed by Laurentian on Jan. 30 as it seeks restructuring under the Companies’ Creditors Arrangement Act (CCAA) due to insolvency. 

It’s a move that’s considered unprecedented in the sector, and one that shocked students and faculty when announced earlier this week.

The $25 million in relief funding is Debtor in Possession (DIP) funding, a special form of financing for insolvent debtors while restructuring is ongoing. Laurentian has sought this funding from Firm Capital Corp. out of Toronto.

Laurentian has proposed that Ernst & Young be the court-appointed monitor of its CCAA filing as it grapples with its financial crisis. The university had actually engaged the same firm this past fall as external financial advisors.

According to information provided by Laurentian on its website dedicated to the CCAA filing, the monitor is a neutral and impartial third party in a CCAA proceeding, and an officer of the court, which means that it is appointed by the court and reports to the court (not to any party).  Generally, the monitor plays a supervisory and advisory role in the proceeding, and oversees the steps taken by Laurentian and assists it in all respects. 

“As set out above, the Proposed Monitor (Ernst & Young) notes that the applicant currently has significant financial challenges and its liquidity position is such that it cannot continue operations, even through to the end of February, in the absence of access to financing pursuant to the DIP Agreement, which is conditional upon the Initial Order being obtained,” said one of the court documents related to Laurentian’s CCAA filing.

“If LU were unable to continue operations, the impact to students would be significant as they would be unable to complete their academic term.”

Lines of credit cut off

The court filings also show that as of its last financial statement on April 30 of last year, Laurentian had liabilities with a book value totalling approximately $322 million.

Also as of April 30, 2020, Laurentian owed $91 million to three different Canadian banks — Royal Bank of Canada ($71.1 million), TD Canada Trust ($18.5 million) and the Bank of Montreal ($1.3 million).

These debt obligations are referred to in the court papers as being “unsecured.” This usually means none of the borrower’s assets (in this case Laurentian is the borrower) are subject to seizure upon default of the loan. Unsecured loans are usually only extended to well-established clients with excellent reputations. Because the loan is unsecured, however, the interest charged tends to be higher.

The court documents say that as of April 30 of last year, LU had drawn $14.4 million against the Desjardins Line of Credit. At the time, the RBC line of credit was undrawn.

Subsequently, additional amounts were drawn on the Desjardins line of credit and then, the full amount owing was repaid in August and September 2020 upon receipt of significant tuition fees. As a result of recent discussions with these lenders in respect of LU’s financial position, RBC has since advised LU that the RBC line of credit has been cancelled and is no longer available to LU. 

In addition, in connection with discussions with Desjardins, LU agreed that it would not draw any amount on the Desjardins line of credit in light of its financial challenges.

In a recent blog entitled “Laurentian Blues,” post-secondary consultant Alex Usher of Higher Education Strategy Associates commented on Laurentian’s CCAA filing, highlighting the situation with the lines of credit.

“Clearly something happened this summer,” Usher said. “Both Desjardins and Royal Bank cut their lines of credit to the institution; in Desjardins’ case, an outstanding $14 million was paid in full when September tuition came in (this was not presented in the court filings as the result of a repayment-in-full demand by Desjardins, but given the context it sure reads that way).  What, if anything, did the banks know that was not evident to anyone else at the time?  We simply don’t know. “

Financial practices and structural issues

The court documents also include some interesting information about the way Laurentian has been managing its money (Usher also refers to this aspect of Laurentian’s situation in his blog).

The documents show that, historically, all funds, whether for operations (i.e. operating grants, tuition and ancillary revenue) or restricted purposes (i.e. research grants, designated scholarships etc.), were deposited into the same bank accounts and effectively co-mingled.

There were no separate bank accounts set up to receive or hold restricted funds. All funds available in the operating accounts were utilized prior to drawing on lines of credit.

Ernst & Young said it is not uncommon for universities to deposit research grants and other restricted funds into their main operating account, but in most cases, these universities have sufficient cash reserves to cover obligations.

However, in LU’s case, the funds held by LU at the current time are insufficient to cover obligations in connection with these restricted funds.

In December, these cash management practices were brought to the attention of LU’s president and the matter was discussed with the board, and separate bank accounts were set up to segregate the different types of funds.

The court documents also outline the reasons behind Laurentian’s insolvency.

As has been widely reported, Laurentian has experienced recurring operational deficits in the millions of dollars each year for the past number of years. 

These operational deficits have led to the accumulated deficit in the operational fund of LU of approximately $20 million at the end of 2019-20 fiscal year. In the current 2020-21 fiscal year, LU projects a further operational deficit of $5.6 million.

The court documents said Laurentian has a number of “structural issues” that are causing financial challenges. These include:

  • The terms of the Laurentian University Faculty Association (LUFA) collective agreement are above market in several respects, and that issue is exacerbated by the tenuous labour relationship between LU and LUFA. This can be seen in the number of grievances (more than 100 unresolved grievances are listed) filed by the union against the university. The two parties have recently been in collective agreement negotiations, and with the CCAA filing, Laurentian is seeking to have a mediator achieve a resolution by April 30 of this year.
  • It costs more for LU and the federated universities (Huntington University, Thorneloe University and the University of Sudbury) to educate each student than the average for all Ontario universities by approximately $2,000 per student, per year. 
  • Laurentian has a large number of programs relative to its number of students. A large number of programs have consistently low enrolment and are not financially sustainable.  Of the 132 undergraduate programs, 25 per cent of students are enrolled in the top five programs, 62 per cent are enrolled in the top 25 and 83 per cent are enrolled in the top 50 programs.
  • Laurentian has been on a building and renovation spree in recent years to modernize outdated buildings and facilities, which was expected to drive enrolment. But enrolment has actually declined, resulting in the principal and debt payments required to service the debt adding additional stress to the operating budget. 
  • The closure of the Barrie campus in 2019 resulted in a decline in enrolment and an obligation under the faculty association’s collective agreement to retain the Barrie faculty.
  • The impact of the COVID-19 pandemic has resulted in issues such as a decrease in residence and parking income, and additional costs associated with COVID-19 protection measures.
  • Continued salary and wage increases, and other inflationary increases in operating expenses.

So how does Laurentian propose to deal with its financial challenges? On its website dedicated to the CCAA filing, the university said while the plan will be further developed, the issues to be addressed include:

  • Reviewing Laurentian’s academic program offerings, so that they better align with programs that students are interested in taking;
  • Re-evaluating the Federated Universities model;
  • Reducing Laurentian’s unsustainable expenses, primarily in salaries;
  • Creating new opportunities for revenue generation; and
  • Considering all options to address current and long-term indebtedness.

Those interested in viewing the court documents related to Laurentian’s CCAA filing can do so here.


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