Laurentian was the first public university in Canada to close its campus in reaction to COVID.  On March 11, after the first case was identified, the institution decided to move to teaching at a distance. 

Almost immediately, the consequences of COVID came into view.  The university had anticipated going into the new fiscal year with a combined $40 million in net deficits, line of credit owing, and “internal borrowing”, and now it was $45 million, with projected losses (at the time) of about $12 million.  There was an expected $7 million in losses from COVID still to come, as well as a $5.4 million loss in net tuition revenue from the domestic cut without any further provincial support to balance it out.  Remember that most of these deficits weren’t financed through long-term lending.  In practice, they were paid by the institution cannibalizing future revenue – basically paying April’s bills with May’s income, and/or using a line of credit to get by.  This prospect would have seemed extremely scary, and so at some point in March 2020, it seems that the university began to look for insolvency counsel, though this was known by almost no one at the time (it was revealed in Ontario Legislature just last month).

Laurentian’s pressures were relieved in the spring and summer of 2020, as expected COVID losses did not materialize: by January 31^st, the expected deficit was down from $12-13 million to just $5.6 million (presumably, this was because the big drop in student enrolments everyone was predicting for Fall 2020 never materialized).  On its own, that probably wasn’t enough improvement to save the situation.  The key to pretty much everything at this point was the line of credit from Desjardins.  With access to that line of credit, the institution likely would have had the liquidity to at least get to the end of the year.  Without it, there was a catastrophic liquidity crunch.

We do not have a full picture of what happened to that Desjardins line of credit, because Laurentian’s affidavit is frustratingly and perhaps deliberately imprecise on the matter.  What we do know is this:

• the line of credit was negotiated in 2019, and was for a maximum of $26 million at prime minus 70 basis points.
• as of April 30, 2020, Laurentian owed this account $14.4 million.
• it was regular practice for the university to use this line of credit to improve liquidity in the period between the two big income dumps in January and September.
• The credit facility contained the following boilerplate clause, “if a material change occurs in the Borrower’s Situation after this offering of financing is accepted and the Financial Institution deems that such change increases the risk the Financial Institution may, in its sole discretion, cancel the facilities made available hereunder, refuse to disburse any facility not yet disbursed, and demand repayment of any amount not yet disbursed.” Note the wording there: those consequences are all separate: it could do one, two or all three of those things.
• As of January 31, 2021, this line of credit had not been cancelled, and Laurentian owed no money to Desjardins.

At some point, Laurentian surrendered $14.4 million in cash.  Did Desjardins actively call in the loan because it was worried about Laurentians financial situation?  Did Laurentian repay voluntarily, assuming that it would be able to use the line again the following January, only to find that Desjardins would not re-up the loan because of concern about financial stability?  In either case, why not cancel the facility?  Or – the most sinister interpretation – did Laurentian repay this loan voluntarily not under the assumption it could get it back in a few months, but rather with the understanding that losing that cash would accelerate the crisis to come? 

On the available evidence, this question cannot be definitely answered.  But I think the fact that the eventual insolvency happened around the time of year Laurentian normally used the credit facility (i.e. after the January tuition payments were in) points to the second option: that is, Laurentian paid assuming it could use the facility again, but that Desjardins refused to disburse any new loans until Laurentian’s financial situation improved, while leaving the credit facility intact because it wanted the university’s business in the future.  I can’t prove that, and I understand other interpretations are possible, but that’s where I sit until someone at Laurentian decides to tell the real story.

With credit facilities gone, there were in theory just two options left to meet the financing gap.  The first was to seize major savings from the unions; something that was possible given there were negotiations with the Laurentian University Faculty Association (LUFA).  Now, to say that LUFA and the Laurentian administration did not get on is an understatement: for whatever reason (and in my experience, in terms of getting to a relationship this crappy, it takes two to tango), the two not only did not communicate very well but tended to take on antagonistic positions as a matter of course.  Over the course of 2020, as the crisis gathered, the university administration was quite blunt about the possibility of insolvency at some point in 2020-21. 

The union reaction was to claim – on the basis of the same documents I used to put together Monday  and Tuesday’s blogs and in response to documents provided by the administration – that the university did not demonstrate that they were facing a financial crisis (for the curious, see paragraphs 96 to 124 in Dr. Colin’s affidavit here and paragraphs 124 to 137 of Dr. Haché’s affidavit here) . It seems the union read the crisis through the lens of the current round of collective bargaining and the extensive number of grievances the LUFA had, and any university claim was met with demands for documentation.  Some documentation was provided, but the union was never satisfied and effectively chose to deny the urgency of the claim and basically told the university that if it was genuinely in trouble, it should declare exigency and make whatever cuts were needed.

Now some people seem to think that this was evidence that the union was in fact being co-operative and accepting on this score (see the comments from when I wrote about this last year), but I think this is a deeply mistaken position.  Exigency is a slow process (6 months to make decisions) and has certain conditions that make real savings difficult (e.g. it forces the university to dismiss younger, lower-paid staff before touching older, much better-paid staff), and it requires long notice periods and very large severance packages to be paid – that is to say it raises costs in the short term in order to achieve long-term efficiencies.  If you have the luxury of a crisis unfolding over four or five years, it might have been appropriate.  But in a crisis of liquidity like the one Laurentian faced, it would actually have massively exacerbated the problem.  Exigency was never a tenable solution to this set of problems.

So, with no radical cost cuts possible and cash running short, we come to the final option: the bail out.  We do not know much about the form the negotiation took, when it started, or anything like that.  A leaked letter last spring implied that the university asked for $100 million for buy-outs and long-term liquidity needs (which probably implies that the university was prepared to go the exigency route until quite close to the date of eventual exigency, provided someone else was paying for it), but that the government offered only about a tenth of that, on condition a full audit was done.  There may have been other numbers and conditions in play: we simply don’t know. 

We do know that in the end whatever was offered by the government was deemed too little by the university, which preferred to go the Companies’ Creditors Arrangement Act (CCAA) route instead.  This was, in a word, momentous, because what it does is simultaneously bring forward all unsecured debt– whatever their original payment schedule was – to the present moment, and then get the creditors to bargain with the debtor for a percentage of the outstanding debt.  At the time Laurentian filed for insolvency, it claimed $181 million in unsecured liability (some of consisted of some pretty iffy lawsuits and therefore won’t be evaluated at par), with $91 million owed to Toronto Dominion Bank and the Royal Bank for all that construction from earlier in the decade.   Since the filing, that amount has gone up to $360 million (much of which, I understand, consists of claims against Laurentian from ex-employees looking for severance and benefits they believe they were due but did not receive).  Laurentian does not have this money: and indeed the more people claim as unsecured creditors, the lower the percentage of funds any individual creditor is likely to receive.

At a certain level, you can see the attractiveness of this strategy.  Getting rid of all these debts at one go – presumably at pennies on the dollar, although the final deal needs to be accepted by creditors holding two-thirds of the debt – would undoubtedly make the new Laurentian more financially viable.  The cost, of course, was a traumatic round of cuts, deeper than at any university in post-war Canadian history, and the seemingly hap-hazard evisceration of a number of academic programs. 

How well did the Laurentian’s administration and Board understand these trade-offs when it declined the government’s bailout offer and chose the CCAA route?  We don’t know.  It would be interesting, one day, to hear their stories.  Because that choice is going to have ramifications for decades.

Tomorrow: questions and alternatives.