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For-Profit Colleges Have Little Blood Left to Give

ITT Educational Services and Corinthian Colleges underscore an industry-wide problem

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As if for-profit colleges like ITT Educational Services (ESI), Corinthian Colleges (COCO), and Apollo Education Group (APOL) weren’t struggling enough already, the latest round of woes for ESI stock may have dealt the industry a death blow.

As it turns out, the potential buyer for 24 properties owned by ITT Tech (which it was going to lease back to the school) backed out of the deal. Now without that cash infusion it was expecting, ITT Educational Services may be too far buried in fiscal quicksand to ever dig its way out.

Of course, investors who have been following the saga of ESI stock and its peers know this chapter pretty much played out as expected. More than that, it’s becoming clear that this is just one of the final chapters in a story that’s going to end tragically.

ITT Educational Services is Getting Desperate

for-profit collegesIn the interest of playing catch-up for anyone who gave up on the for-profit colleges long ago, ESI stock (like many other for-profit school stocks) has been struggling since 2010.

That’s when the Department of Education recognized the for-profit education industry was spewing out a disproportional number of graduates who weren’t getting jobs, and therefore were defaulting on their government-supplied student loans.

The eventual solution — and bear in mind this is the highly simplified explanation — was cutting off these schools’ lifeblood … student loans; the weak graduation rates and questionable “recruitment” tactics for these institutions made for eye-opening headlines without any further help from the DOE.

The end result? For-profit colleges began to unravel. Their very existence in their present form is being called into question, with most of them seeing declining revenue since 2010. Some of them, including ITT Educational Services, finally swung to a loss in the last quarter of 2013, and there’s no end in sight to the trend of weaker revenue and net losses for many of these institutions.

To buy some time and beef up its liquidity, ITT Educational Services announced in May that it would seek to sell a couple dozen of its properties to the tune of $119 million. The buyer wanted more time to mull the deal, but ITT couldn’t afford to wait, as doing so could limit sale negotiations with other potential buyers. Ergo, as of right now there is no buyer at the table, and no clear future for ITT Tech.

In the same SEC filing that let investors know the buyer was no longer interested, however, ITT Educational Services also explained that the for-profit school still runs the risk of being declared “not financially responsible” by the DOE, by virtue of the school’s failure to refile its recent quarterly reports.

The company’s creditors have temporarily upped its credit facility to survive a potential demand from the Department of Education that has the potential to disqualify the school from receiving any federally-funded loan money. Problem: The core causes of ITT Educational Services’ financial woes still haven’t been resolved. That is, enrollment is slumping, and losses are growing.

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Article printed from InvestorPlace Media,

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