Debt Looming
The Chronicle of Higher Education‘s current issue offers an article that’s unfortunately timely and appros. Debt Bomb is Ticking discusses an unfortunate confluence of events: higher education institutions borrowed a lot of money to build and renovate structures (including residence halls). Thanks to the lackluster economy, the value of the assets held by the institutions have plummeted, leaving the institutions with a risky debt-to-assets ratio. An unbalanced ratio may violate the terms of the institution’s agreement (or covenant) with the bond holder or bank. In these circumstances, the loaning institution can demand repayment of all or part of the loan.
As with other elements of the declining economy, the effects can cascade. The US Department of Education uses financial data to determine institutions’ eligibility for federal student aid. Some of the debt swaps institutions made to hedge against rising interest rates on their debts have now become problematic, and unless interest rates change considerably by June, these transactions will have to be labeled liabilities in year-end financial statements.
Tags: Construction, Debt, Money