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Corinthian Colleges Warns of Possible Shutdown; Restrictions on Federal Funding Leave For-Profit Educator in Cash Crisis

Corinthian Colleges Warns of Possible Shutdown

Restrictions on Federal Funding Leave For-Profit Educator in Cash Crisis

STEPHANIE GLEASON and JOSH MITCHELL

Updated June 19, 2014 8:01 p.m. ET

One of the country’s largest for-profit education companies warned Thursday that it may have to shut down after the Obama administration moved to restrict the company’s access to federal funding.

Corinthian Colleges Inc., COCO -67.06% which operates Everest College and other schools, has about 72,000 students who receive roughly $1.4 billion in federal financial aid each year. But the company and its for-profit rivals, which enroll about 13% of the nation’s higher-education students, are drawing greater scrutiny from regulators over concerns about their marketing, dropout rates and loan defaults among their students.

The U.S. Department of Education has increased its oversight of Corinthian because, it said, the school hasn’t addressed concerns about its marketing practices, including allegations of falsifying job-placement data.

The company, whose schools also include Everest Institute, WyoTech and Heald, said in a financial filing Thursday that it has expended substantial resources responding to the department’s concerns, and will continue to cooperate with its review.

Under new restrictions imposed by the department, Corinthian’s ability to access requested federal funds will be delayed 21 days. Usually, the company said, the funds—loans and grants that students use to cover tuition and other fees—would be available within 24 to 72 hours of request.

The delay has squeezed Corinthian, which gets 80% of its revenue from federal funding. The company said in regulatory filings that its lenders have refused to provide bridge financing, and that it has been unable to find other sources of cash. Its board met Thursday to discuss next steps.

A person familiar with the matter said the company might have between 24 hours and a week to line up rescue financing.

The company’s shares plummeted 67% to 28 cents in Thursday’s trading. The stock had already fallen by more than 60% over the past 12 months through Wednesday’s close. It traded above $30 a share at its peak 10 years ago.

The Obama administration’s move to restrict Corinthian’s funding, made last week but not disclosed until Thursday, signals a newly aggressive approach to policing the for-profit education industry. The Department of Education has proposedeliminating federal funding for for-profit schools with high proportions of graduates who default on their student loans or whose debt levels are high relative to their incomes. The Consumer Financial Protection Bureau, meanwhile, is investigating whether the schools coax students into taking out high-cost loans.

Several states also have been looking into the industry. In January, state attorneys general sent subpoenas to Corinthian, as well as Career EducationCorp. CECO -9.18% , Education Management Corp. EDMC -4.21% and ITT Educational Services Inc., ESI -6.06% demanding documents from the four companies about financing and recruitment practices.

Finding rescue financing may be Corinthian’s only chance of survival. Filing for Chapter 11 bankruptcy protection would likely revoke Corinthian’s eligibility to accept student-loan money.

A spokesman for Corinthian declined to comment Thursday.

Regulatory filings show that the company, which is based in Santa Ana, Calif., had $28 million in cash on its balance sheet as of March 31, down from $32.8 million as of Dec. 31.

Wells Capital Management Inc. holds the biggest equity stake in Corinthian, with 13.79%, while Shah Capital Management Inc. is No. 2, with 8.1%.

The Department of Education has accused Corinthian of failing to cooperate with a federal probe into allegations the company misled the public on its graduates’ job-placement rates. Federal officials said the company has failed to respond to five letters since January requesting data and various documents.

“The Department’s foremost interest is to protect students and make sure they are educated by institutions that operate in accordance with our standards,” Education Undersecretary Ted Mitchell said in a statement Thursday. “We made the decision to increase oversight of Corinthian Colleges after careful consideration and as part of our obligations to protect hardworking taxpayers and students’ futures.”

After Thursday’s disclosure, Michael Tarkan, an analyst with Compass Point Research & Trading in Washington, cut his price target on the company to zero from 50 cents. “This action significantly impacts the company’s already thin liquidity position, and if the company cannot find alternative sources of financing, it may not be able to continue as a going concern,” he wrote.

In addition to growing regulatory pressure, for-profit colleges are struggling with rising competition, deteriorating reputations and a lagging economy.

Education Management, which operates 50 Art Institutes and other postsecondary schools, said recently that new student enrollment fell by nearly 10% in the first quarter and enrollment overall was down $15.7%. It warned last month that it was likely to breach its loan agreement on June 30, potentially placing well over $1 billion in debt in default.

ITT Educational Services, the operator of the ITT Tech colleges, also saw its enrollment fall during the first quarter, down 3.8% for new student enrollment and 6.4% overall.

In March, the company was able to negotiate with lenders to amend its loan agreements. Without these amendments, the company said it would have been in default. Recently, ITT was delisted from the New York Stock Exchange because it failed to file its annual report with the U.S. Securities and Exchange Commission.

Representatives of Education Management and ITT Educational couldn’t be reached for comment Thursday.

 

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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