ITT cash crunch has analysts raising spectre of bankruptcy

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ITT Educational Services Inc. has no more margin of error—and investors know it.

That’s why the stock price of the Carmel-based operator of for-profit colleges cratered 46 percent on Monday after a deal to sell and lease back 24 of its campuses fell through. Shares closed Monday at $7.72 and ticket down to $7.69 by midday Tuesday.

The collapsed real estate deal may have also sealed the fate of ITT CEO Kevin Modany, who announced late Monday that he will resign in the next six months.

And it’s why some Wall Street analysts following ITT have started including the possibility of bankruptcy liquidation in their forecasts for ITT.

“As the company’s range of options is further limited (especially on the use of its real estate), liquidation is becoming a possibility,” wrote Morgan Stanley analyst Suzanne Stein in a Monday note to investors, although she noted that possibility was “very unlikely.”

ITT needs the cash from selling its real estate, as much as $119 million, to pay off credit unions that have incurred sky-high losses on loans made to ITT students from 2009 to 2011. Those loan losses, which resulted from default rates that soared above 60 percent, will likely require it to pay $228 million by 2020.

But ITT backed away from a sale to an unnamed buyer when the buyer asked for more time for due diligence.

The real estate proceeds have become especially important because ITT’s main source of cash—student tuition—is under threat from two directions. First, an attempt by ITT to make its marketing more efficient backfired, leading to declines in new students in the second quarter of 10 percent to 15 percent.

Second, the U.S. Department of Education could place ITT on “heightened cash monitoring” because the company has failed to file its audited financial statements for 2013 and 2014.

There are more than 400 colleges in a state of “heightened cash monitoring” with the Education Department, with little interruption to their business. However, in June, the Education Department hit one of the operators of those 400 colleges—California-based Corinthian Colleges Inc.—with a 21-day delay in federal student loan payments. That tipped Corinthian’s finances over the edge, forcing it to shut down entirely.

With that precedent, analysts say, it’s an outside possibility with ITT. Federal student loans make up about three-fourths of ITT's annual revenue.

Speaking of Corinthian by its ticker symbol, Stein wrote, “Prior to COCO’s shutdown, we thought [the Education Department] would be reluctant to force an institution to close. However, with COCO as a precedent, it is now a possibility.”

Because of the Education Department’s scrutiny, ITT already persuaded its lenders to extend a $98 million letter of credit to assure the Education Department of its financial worthiness, even without audited financial statements.

Those statements have been delayed because ITT has decided it needs to finally account for the student loans made by credit unions on its balance sheet, which will alter its financial statements for at least 2013 and 2014.

But its lateness in restating those results triggered the Education Department scrutiny and likely restrictions.

To win the approval of that letter of credit, ITT promised its lenders that payments from the Education Department would not be delayed any more than five days.

If they are, its lenders can call their loans—forcing ITT to scramble to find new lenders. If that happened and ITT could not find new lenders, then it might have to shut down its business.

“We believe these scenarios are onerous from an equityholder’s perspective, but less so from a first-lien debtholder, which gives us confidence that ITT will in fact secure financing to remain a going concern,” wrote Timo Connor, an analyst at William Blair & Co., in a research note Tuesday morning. “But the tightrope it has been walking for the past few years is getting narrower.”


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