Updated: Apr 23, 2020
Restructuring Projects and P3 Transactions in the Face of COVID-19
Most academic renovation and construction projects in the country have been suspended or deferred, as required by individual state responses to the COVID-19 pandemic. These actions present genuine legal and financial risks that need to be addressed immediately by organizing a comprehensive plan to restart these projects when permitted to do so. In this article, we focus on what universities and their lenders and investors need to do to minimize loss and maximize long-term financial stability of projects and P3 transactions in this volatile and unprecedented environment. 1. Projects in the Middle of Construction Concerns about the financial stability of construction firms and their surety providers, cost escalation, labor and material availability, suspension clause and force majeure contractual obligations, funding availability and a “healthy” jobsite should not be taken lightly. In many contracts, suspension of a project by the owner for more than 90 days opens negotiations for additional fees and extensions of time. Proper notice needs to be given by all parties, acknowledging the status of the project and the issues known to date that affect the overall performance of the project. A university’s restart plan should begin with an unfiltered view of the overall project schedule and take into account critical issues such as completion and turnover dates, status of construction documents, status of the permitting and inspection process, manpower availability, weather, and the fabrication and delivery of long-lead material and specialty equipment that will impact the project. A financial and legal review of construction documents needs to accompany a revised schedule. This review also needs to accurately validate the work completed as of the date the project was suspended or deferred. Payment applications, lien releases, and surety commitments are critical components to moving forward, and establishing the costs to complete the project and P3 transaction will benefit the university from both a legal and a financial perspective. Universities should form a team led by an independent party with the capability to organize the diverse group of stakeholders and advisors that will be required to address your specific project issues. Keep in mind, the purpose of the restart plan is to identify, mitigate, and eliminate the inevitable conflicts that will be present when the project resumes. Communicating the intent of the plan also will serve to let your project team members know the university is interested in moving forward in an orderly manner, and that all stakeholder interests are well served by the university’s intentions and actions. 2. New Cashflow Projections For projects and P3 transactions whose financings are based on revenue projections, it is critically important to recast operating cash flow projections. This is equally true for both completed projects and projects that are not yet completed. This includes revising assumptions, forecasts, and business plans that reflect the new reality facing the world. It is important to prepare current projections that consider the best and worst cases for the next few months and longer. 3. Develop A New Financial and Operating Plan Universities and operators may be good at managing operations in times of mild to moderate stress; however, few projects or P3 transactions have ever faced the dramatic, escalating crisis resulting from the COVID-19 pandemic. None of us have! What we are facing now has not happened for over a century. There is no playbook for how the economy will respond, but there are the documents to which we must respond. We believe universities have little choice but to pivot meaningfully and to think unthinkable scenarios; budgeting and strategic planning will be key to continued operations. This planning must address the new reality reflected by revised and updated projections, and should include: Legal and business review of existing credit facility documents: The first action is to review loan and bond indenture documents thoroughly, with attention to non-monetary covenants and key performance indicators/covenants that could cause a default. If covenant breaches are possible in most scenarios, we think it will be important to be proactive and to develop a strategy to discuss standstill and waiver agreements with the lender or the trustee for bondholders, and to determine whether covenant breaches create cross defaults in other university obligations. To the extent a project or P3 transaction has multiple levels of financing, it is important to review the intercreditor agreements and include all tiers of lender or the trustee in discussions, because if covenant relief is necessary, it will likely take a collective and collaborative effort. Working with a professional legal and financial advisor team to open lender or trustee communications: Many times, universities that need to obtain additional financing or relief for a project or P3 transaction on an emergency basis think that engaging professionals to assist is a sign of weakness, or requires expenditures they would prefer not to make. To the contrary, involving professionals in the process provides significant credibility to the “ask,” or request to the lender or the trustee. Lenders, investors, and trustees for bondholders may be more willing to respond quickly and positively if provided with information that has been reviewed by legal and financial advisors. Attempting to save money by not hiring a professional team can jeopardize the ultimate success of discussions with lenders, trustees, and investors. If there are existing covenant breaches, a legal and financial team can guide proposals for relief. Many lenders and trustees will require the appointment of financial advisory teams and are not comfortable negotiating without the involvement of counsel. Sometimes, off–balance sheet P3 transactions carry provisions that will trigger in circumstances like the current environment, causing the university project sponsor to be obligated for revenue shortfalls or to divert demand to the P3 project versus other, wholly-owned university projects. A careful analysis of the underlying financing documents is required before support payments are made. Lastly, projects and P3 transactions can pursue many paths for available relief, including standstill and forbearance agreements, amendments, extensions, restructuring, and increased indebtedness—all of which may provide the needed relief. It is more efficient and productive to start the conversation with existing lenders and trustees sooner rather than later. In this environment, legal and financial teams will need to be open to suggesting new and creative options. The growing level of financial stress and distress is expected to make lenders and trustees more receptive to new options, because they must manage defaults to preserve value for investors. We believe an open and constructive dialogue with your financing partner will produce the best result for all parties. 4. What if maintaining existing financing is not viable? Once a university is aware of a project or P3 transaction’s inability to perform, the university must work to establish strategies for each of its constituent groups, including partners, employees, lenders, trade creditors and suppliers, customers, and investors. The budget and strategy must also include developing communication plans for each of these groups. Professional advice is necessary to manage the financial disclosure required by regulators and oversight bodies, including the Securities and Exchange Commission and the MSRB (EMMA). Absolutely, do not post anything on EMMA before you have spoken to and vetted your materials with your counsel and advisor. Retaining legal and financial advisors is critical when negotiating an impending default or forecasted inability to perform on contracts or other obligations. These services are likely to be in high demand over the next few years, so universities should lock in its advisors before they become committed elsewhere. Universities should seek outside perspective from counsel and financial advisors and have a budget and strategic plan in place to address the serious issues and to minimize risk and maximize value. The strong instinct to save the institution dollars by self-solving and self-implementing solutions must be weighed against the value and expertise that outside perspectives bring. Outside advice is critical to a board’s exercise of its duty of care to the project and P3 transaction and its stakeholders. A board’s awareness of fiduciary duties based on experienced professional advice can prevent serious consequences down the road. While universities are very skilled at operating under normal conditions, for most projects and P3 transactions facing the current COVID-19 pandemic, creative outside help is needed in this abnormal time. It may be appropriate to consider several teams: a legal team, a finance team (see our article), and a communications team. Once a budget (perhaps several budgets) and a strategic plan are approved, initiating discussions with lenders, trustees, and other stakeholders will require financial disclosure, including projections. Lenders and trustees will need to verify financial and operating information in order to consider and approve requests regarding covenant relief, standstill and forbearance of defaults, and restructuring the debt. Given the extreme uncertainty of the future, the plan will likely include many restructuring strategies. Universities will also have to pay close attention to outlays that were not anticipated to be borne by the university in order to keep the project operating in the short run. How do these amounts get reconciled relative to project documents and negotiations? It is important to determine what the specific requests for relief will be to allow the project to continue operating in this unpredictable environment. These requests include what is needed to avoid default on short- and long-term financing obligations, as well as what is needed to maintain relationships with vendors and suppliers. Additionally, what do reduced operations look like, and what are the implications? Relationships with lenders, trustees, investors, and other creditors can be more easily maintained if communication is open and candid, and if there are professional advisors helping the project and P3 transaction to determine which requests are approved. Blue Rose Capital Advisors and DeveloP3rs are experienced in representing universities and negotiating on behalf of clients with creditors, investors, bondholders, and other parties in a wide variety of transactions. Johan Rosenberg is Chairman of Blue Rose Capital Advisors and serves as a lead advisors on P3 projects and other capital market transactions. Contributing to this article is Robert W. Saunders, Vice President of Strategic Partnerships for Momentum, a firm that provides planning, design and construction management services.
Contact Us! Johan Rosenberg and Justin D. Krieg, PhD DeveloP3rs - a Division of Blue Rose Capital Advisors, LLC/ TRIL 1 LP www.DeveloP3rs.com | (952) 746-6050 | firstname.lastname@example.org DeveloP3rs@blueroseadvisors.com