Corinthian takedown signals tougher enforcement
ITT Educational, based in Carmel, Indiana, is also facing stricter enforcement of Education Department rules, Tarkan said. Told by the Securities and Exchange Commission that it must restate its finances going back to February 2013 to properly account for student-loan liability, the company wasn’t able to submit required financial documents to the agency.
ITT Educational alerted investors that, because of the compliance issue, it may have to provide the department with a letter of credit worth $80 million to remain eligible for government funds. While ITT Educational’s balance sheet can absorb the blow, it’s another signal of a tougher agency stance, Tarkan said.
"The companies with less flexibility from a capital standpoint are the ones to be concerned about," he said. "If you’re a for-profit college that’s had regulatory pressures, capital pressures, you have to think about this more seriously than ever before."
ITT Educational has kept the Education Department informed about its issues with the SEC and that submission of its documents would be delayed, said Nicole Elam, a company spokeswoman, in an e-mailed statement. The company intends to file by July 31, she said.
Most for-profit college companies have the needed financial flexibility, at least for the time being. Steven Azarbad, chief investment officer of Maglan Capital LLC in New York, holds about 150,000 shares of University of Phoenix owner Apollo Education Group Inc., and says he’s confident both in the company’s cash position and its regulatory compliance.
"This is something that’s really directed at Corinthian," Azarbad said in a telephone interview. "This is like any other business" where some companies fail, he said.
Ryan Rauzon, a spokesman for Phoenix-based Apollo, declined to comment.
Wells Fargo’s Urdan said one company that may be vulnerable to agency action is Pittsburgh-based Education Management, partly owned by Goldman Sachs Group Inc. and Providence Equity Partners. As falling enrollments have hurt revenue, the value of the company’s debt has dropped, and the operator of the Art Institute, Brown Mackie, Argosy and South University chains can’t satisfy the terms of its credit accord.
"We’ve recently secured a waiver from our lenders and continue to have ongoing, proactive discussions with them to finalize an outcome that benefits all parties involved," said Tyler Gronbach, a spokesman for Education Management, in a telephone interview.
Debt holders are unlikely to take over the company as a change in ownership would require Education Management to seek new academic accreditation, Urdan said. The company is attempting to negotiate a resolution with its creditors, perhaps by swapping some of its borrowings for equity.
If such a swap were successful, "then Education Management’s financial situation looks very different," Urdan said. "They’ll have much less to worry about."
— With assistance from Michael McDonald in Boston and Janet Lorin and Sridhar Natarajan in New York.