Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, February 2, 1992 TAG: 9202030192
SECTION: VIRGINIA PAGE: A1 EDITION: METRO
SOURCE: CODY LOWE RELIGION WRITER
DATELINE: LYNCHBURG LENGTH: Long
LIBERTY U. NOT BROKE, BUT VULNERABLE FALWELL BLAMES SQUEEZE ON LOSS OF BOND
FOR MONTHS, speculation about the financial health of the Jerry Falwell Mini-istries has been making headlines. The fate of Liberty University has been bob- bing in a sea of litigation. Last week, Falwell agreed to discuss where he be- lieves his organization stands.
Jerry Falwell says Liberty University isn't bankrupt or broke.
But he acknowledges that the school's financial crisis has left the university at the mercy of any major creditor who might decide to press the case for repayment.
Liberty has suspended payments on much of its $80 million in debts in a bid to pressure some of its creditors to come to agreement on a long-term repayment plan.
The school's financial situation has become so serious that "the easy route" would be to "go tomorrow and file a Chapter 11" bankruptcy petition for protection from creditors, Falwell said in an interview last week.
Instead, the school has a tentative, not-yet-formalized "work-out" reorganization plan that would stretch repayment to its current creditors. Falwell said he believes the move will spare the 21-year-old school the stigma of going to the federal bankruptcy courts for protection.
The only thing that could prevent the success of the plan, Falwell said, "would be for some creditors - and we don't know who they might be - to decide, `I'm going to sue and seek a judgment' [which] might cause us to have to go to federal court to stop them."
About $10 million of the total debt includes current accounts payable and some existing long-term debt the university doesn't need to realign, Falwell said.
The four largest creditors hold more than $50 million of the debt, and they "all have been working very cordially with us" to come up with a new payment plan, he said.
Phone calls seeking comment from some of the major creditors were not returned last week.
To help encourage continued progress in the negotiations, "part of the plan is that - this was as of a few days ago - we don't pay anybody anything now until the `work-out' plan is in place."
This "stand-still agreement . . . gives motivation to everybody to come to the table, get this thing solved and then everybody get paid totally - interest and principal - over a long period of time."
Still, lawsuits have continued as creditors maneuver for better position in any pay-back plan. Some of the smaller ones have been settled.
Bond loss was critical
Day-to-day life on the campus is relatively unaffected, but the unsettled situation has left the university with a huge new cafeteria sitting empty and unused for the past year after being 90 percent completed. The contractor - Coleman Adams of Lynchburg - stopped work and filed suit to get the last half of the $3.3 million it was owed on the project.
Falwell, Liberty's founder and chancellor, blames the university's current financial woes on the last-minute decision by Kemper Securities of Chicago not to issue $61 million in bonds for the school in November 1990.
Kemper officials have contended that nothing was confirmed in writing and said they discovered there was no market for the bonds before deciding to issue them.
Falwell said the Duff & Phelps bond-rating firm had already given the planned bond issue ratings of "AA" and "A."
When the bond issue fell through, "Liberty was instantly put into a crisis," Falwell said, leading it to sue Kemper. The disagreement was referred to binding arbitration - which is expected to be finished in late March or early April.
The university is seeking to force the securities firm to issue the $61 million in bonds and to pay damages of $50 million for "direct damages Liberty has suffered" in attorney and accountant fees, accelerated interest and lost income.
Falwell contends that "they can never properly repay us for the anguish and loss of credibility that we've endured in the last 14 to 15 months."
"It has also put a big question mark in the marketplace among other investment firms" that might have been potential lenders to Liberty.
Since the Kemper deal fell through, Liberty has been unable to find alternative financing, and its student enrollment has dropped slightly this year.
"Miraculously, friendly creditors and the Lord's provision of substantial gifts of several million dollars in the last few months have enabled Liberty to stay alive and well - or alive and reasonably healthy - to the extent that I can now say, Liberty University is here to stay.
"We are far enough along in preliminary talks with major creditors to feel comfortable that a work-out plan is now feasible."
Everyone gets paid
Even if the university were forced to file for court protection, Falwell said, he is confident there are enough creditors in agreement with the proposed reorganization plan for it to be accepted by a court.
"The reason we don't like the court supervision, for one thing, is a national media that magnifies the spectacular. Rather than looking at it as a reorganization with everyone getting paid everything - principal and interest - they would maximize `bankruptcy.'
"In fact, Liberty isn't bankrupt, never has been. . . . If you're big enough, like Texaco when it lost the Getty suit, nobody believes you're bankrupt and you're OK even if you seek the protection of the courts. But what of a little school in Virginia where the headline is `bankrupt?'
"What parents would send their students there? Who's going to bring an 18-year-old boy here and leave him and pay $12,000 or $10,000 to get him through the school year when that word `bankrupt' says `they may not be operating in November and I will have lost my money.' "
"So those are reasons - recruitment problems, fund raising, all these things are hampered. So we have avoided, like the plague, protection from the court.
"We also are very honest people here, and in 36 years as a church and 21 years as a university, we have never failed to pay one person one dollar, principal or interest, owed them."
Though Falwell blames the immediate crisis on Kemper, he traces its roots to the televangelism scandals of the late 1980s.
"Media ministries took a broadside" hit from which they have never fully recovered, he said.
The Jim Bakker and Jimmy Swaggart scandals caused so much damage to credibility that even more recent accusations against television ministers such as Robert Tilton can't make it any worse, Falwell said.
The year following the PTL scandals in the spring of 1987, donations to all of Falwell's ministries dropped by about 18 percent.
"We anticipated that . . . and survived that." By 1989, the university was making massive cutbacks in spending and personnel - from 2,300 employees to 1,800 - to adjust to the drop in donations.
Falwell points out that the school also has survived a number of other challenges in recent months - challenges that, while not contributing directly to the financial crisis, had added to an embattled campus psyche.
The school in December was reaccredited after a 1 1/2-year probation by the Southern Association of Colleges and Schools. The accrediting agency had cited deficiencies in the off-campus degree program, the Liberty University School of Life-Long Learning. Liberty estimates it cost $2 million to establish reaccreditation. Falwell says the restructuring was ultimately good for the program, making it a strong external-degree curriculum.
Last obstacle: financing
Following the Bakker scandals, the Internal Revenue Service began what became a 3 1/2-year investigation of about 30 television ministries, including Falwell's. That also concluded in December with "a clean bill of health" and no penalties.
In just the last week or so, the school was notified that it will not be liable for repayment of $6 million worth of student loans and grants that the U.S. Department of Education had originally said were due from the School of Life-Long Learning. More than 300 other schools with similar types of programs also were let off the hook by congressional action, Falwell said.
"The Remaining Challenge," says Liberty President A. Pierre Guillermin in the February issue of "Liberty Update," is financing.
Falwell says Liberty's fiscal situation was fine until it agreed to buy the campus from the Old Time Gospel Hour, the financial arm of Thomas Road Baptist Church. They did that to qualify for the Kemper financing in June 1990.
The school paid $25 million of the $75 million price and financed the rest. The school will have had no trouble paying that and the rest of its bills off with long-term financing, Falwell said.
Before buying the campus, Falwell said, Liberty had little debt and a favorable 99-year lease on the campus.
The university no longer has the liability of the North Campus property, which was sold at a trustee's sale late last year. But that sale also wiped $4 million from the assets side of the ledger.
The university - with 11,000 students - will rely on student tuition and fees, and the contributions of supporters, to repay the costs of long-term financing. Falwell is confident the university is capable of doing that.
So, he's eager to have a settlement of the Kemper case.
"If you'd ask me my opinion, pure guess, we're more likely to get major settlement of damages than we are to get a loan from them. I don't think you'd get both. There's a possibility, and I think a strong one, that we could be given a major damages settlement and then that would strengthen us to the point that we would probably go find financing where we needed it.
"But this is all pure conjecture, it's far weaker than even betting on a 20-to-1 horse."
CREDIT CRUNCH LIBERTY\ U.S.'s FOUR LARGEST CREDITORS\ Trust Management Inc.: holds first deed on the Main Campus - $17 million. House-hold International Finance: holds student defaults on financing for the Liberty Home Bible Institute program-about $15 million. Christian Mutual Life Insurance Co.: provided interim financing while awaiting Kemper bonds - about $15 million. Marriott: supplies food service to the university - $5 million.
Memo: CORRECTION