Federal Crackdown Puts Corinthian Colleges’ Future in Doubt

June 20, 2014

The Department of Education has tightened its financial oversight of the already hobbled Corinthian Colleges Inc. The action, on top of the company’s existing cash-flow shortages and its failed attempts to date to borrow more money, could mean the 77,000-student higher-education company would be "unable to continue as a going concern," Corinthian revealed on Thursday.

Corinthian, which owns Everest College, Everest Institute, Wyo-Tech, and Heald College institutions, announced in May that it had hired a banker to explore "strategic alternatives"—business jargon for when companies put all or parts of themselves up for sale or merger.

The department’s action prompted several Wall Street analysts to speculate on whether Corinthian would become the first publicly traded higher-education company to be forced out of business because of a federal crackdown since 2001, when Computer Learning Centers declared bankruptcy, leaving 10,000 students in the lurch. There are some similarities, but in the case of Computer Learning Centers, the bankruptcy was triggered not only by the increased scrutiny but also by a department demand that the company return $187-million in federal student-aid funds.

Corinthian receives about $1.4-billion annually from the federal government via Pell Grants and federal student loans, the department said. Under the new restrictions, all of its colleges will now be placed under "heightened cash management" status, which means funds flowing from the department to Corinthian institutions won’t be disbursed automatically but will be subject to additional review. In addition, the department said it would institute a 21-day delay on all disbursements of funds to Corinthian’s campuses.

The department said it was imposing the financial restrictions because of Corinthian’s repeated refusals since January to respond to requests for data about inconsistencies in the job-placement rates the company has reported publicly and to various regulatory bodies, as well as data related to allegations that student grades and attendance records were altered.

According to analysts with the investment firm Stifel Nicolaus & Company, however, Corinthian has indicated that it has been trying to comply with the department’s requests. The company says it has devoted "significant" resources to that effort and has assigned approximately 100 additional employees to it, the analysts, Jerry R. Herman and Jason P. Anderson, said in a report released on Thursday.

‘A Critical Stage’

The department does not typically issue news releases when it imposes financial restrictions on colleges, but it did so in this case, quoting the new under secretary of education, Ted Mitchell, as saying that the department had taken the steps "as part of our obligation to protect hard-working taxpayers and students’ future."

The department’s release came a few hours after Corinthian announced the information in a filing with the Securities and Exchange Commission. Corinthian said it had received the department’s news on June 12.

Corinthian officials declined to comment in response to questions from The Chronicle as to whether it had begun seeking alternative options for its current students if it can’t borrow the money it needs to stay in business. As of March 31, the company reported $28-million in cash on hand and $72.8-million in debt. News of the department’s action also sent the company’s floundering stock into a price dive. It closed at 28 cents a share on Thursday (down from 85 cents a share the day before), which gave the company a stock-market value of just $24.5-million.

Mr. Herman, of Stifel Nicolaus, said the developments marked "a critical stage" for the company and the department.

After the 2001 bankruptcy of Computer Learning Centers, a chain of computer-training schools based in Virginia, the department was "excoriated" by Congress for overreaching, the Wells Fargo analyst Trace Urdan said in a note on Thursday. And until recently, many in and around the for-profit-college industry had assumed that, in the wake of the Virginia company’s bankruptcy and the disruption it caused, the department would take a "too big to fail" posture and be reluctant to take steps that could threaten the existence of a college company.

That may no longer be the case, Mr. Urdan said in an interview with The Chronicle on Thursday. The department is "definitely laying down a marker" that, if it has concerns about issues it considers important to student protection, that "is more important than the disruption it will cause," he said.

With the department’s actions, Corinthian is now probably the most financially vulnerable of the publicly traded higher-education companies, but it is not the only one facing debt problems.

ITT Educational Services, for example, recently announced it would be raising cash by selling and leasing back some of its campus facilities in case it is required to cover debt payments related to a student-loan program offered to its students.

The Education Management Corporation, meanwhile, faces the threat of defaulting on some of its $1.3-billion in debt on June 30 unless it can obtain a waiver or restructure its obligations.