Why ITT Educational Could Be The Next For-Profit College To Collapse
It's all linked to the fall of Corinthian Colleges last month.
Since a funding freeze by the Department of Education helped trigger the collapse of Corinthian Colleges in July, the eyes of the for-profit educational investor community have been on ITT Educational Services, an operator under intense regulatory scrutiny that looks like the next possible target for the Education Department.
At first it seemed ITT would be able to weather any Education Department sanctions — it had far more cash on hand than Corinthian, and its stock was trading at a respectable $14 level. But a series of hits to the company's finances in the past week have put ITT on such shaky financial ground that, even if the Education Department were to impose a funding freeze far more mild than the one that brought down Corinthian, ITT could face bankruptcy.
Investors have taken notice: ITT's stock has fallen some 40% in a week. It closed trading Thursday at just $8.31, well below its 52-week high of $45.40.
The company's market cap was cut in half on Monday, when it announced that a deal to sell off some of its real estate had fallen through, causing it to lose out on a potential $119 million windfall and triggering a massive selloff of its stock. That same day, ITT's CEO announced he would resign, although the company said he was leaving for "personal reasons" unrelated to ITT's financial woes.
But another, less obvious risk to ITT's future stems from new terms imposed by the company's lenders last week, said Trace Urdan, an analyst with Wells Fargo. Skittish that the government might target ITT as it did with Corinthian, its creditors included a provision that a government-imposed funding delay of more than five days would send ITT into default, potentially making it ineligible to receive any government money. The delay that Corinthian Colleges faced was a much more serious 21 days.
"It's kind of an automatic game-over scenario for them now if they receive that penalty," Urdan said. That risk is especially pronounced given the loss of cash from Monday's collapsed real estate deal.
Urdan said the possibility of ITT's facing significant financial penalties was "too close for comfort" for investors. Like Corinthian, ITT has faced heavy pressure from the government: it was sued in February by the Consumer Financial Protection Bureau for allegedly misleading students and pushing them into a predatory lending scheme. At the end of July, the school missed a deadline to provide data on its student loans to the Education Department, putting it at greater risk for the "heightened cash monitoring" status that, paired with the funding freeze, brought down Corinthian.
ITT Educational says it's working with the Education Department to make sure the potentially lethal funding delay isn't imposed.