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Down but Not Out?

July 7, 2014

ITT Educational Services missed a deadline last week for filing financial documents with the U.S. Department of Education. The for-profit chain’s scramble to comply with the feds drew comparisons to the struggling Corinthian Colleges. But ITT’s situation is less dire.

ITT has 135 locations, currently enrolling 55,000 students in 39 states and online.

Much of the federal scrutiny of ITT revolves around its former private loan program, called PEAKS.

In February the Consumer Financial Protection Bureau (CFPB) sued the company, alleging it pressured students into taking out high-interest, high-risk loans under the program. Critics also said the company used PEAKS to bring in more private money to avoid running afoul of rules requiring that no more than 90 percent of for-profits’ revenue comes from federal sources.

The company filed a motion to dismiss the CFPB lawsuit, claiming it is legally flawed and falls outside the bureau's jurisdiction.

ITT’s private loan program lasted from 2010 until 2012. But confusion on how to report the $300 million in loans has held up the company’s financial disclosures for last year.

In March ITT asked the U.S. Securities and Exchange Commission (SEC) for guidance on its accounting. The response came back on June 18, according to a corporate filing. The SEC said the PEAKS program should be included in the company’s consolidated financial statements for 2013.

That gave ITT less than two weeks to submit a wide range of federal aid documentation to the Education Department.

However, the company had given the feds a heads-up that it was unlikely to hit the deadline.

“We informed the department, in advance, that the audited financial statements and compliance audit would probably be late due to our inquiry to the SEC regarding accounting issues,” an ITT spokeswoman said via email. “The department is aware that we hope to submit our audited financial statements and compliance audit within the next few weeks.”

As result, experts said the department is less likely to impose the cash freeze it slapped on Corinthian. That sanction, dubbed “heightened cash monitoring,” can lead to held financial aid payments for 60 days or more.

ITT last Wednesday disclosed the risks of federal penalties as a result of the missed deadline. They include tighter cash monitoring and the possibility of being required to issue a letter of credit to the department of up to $80 million. The department could also revoke the company’s eligibility to participate in federal financial aid programs, according to the filing.

That announcement prompted some media outlets and other observers to lump ITT in with Corinthian, which is working with the department to sell or close all of its 107 campuses and its online programs. But financial analysts said ITT is less likely to fail, despite the possible penalties.

Trace Urdan, a senior analyst with Wells Fargo Securities, said the letter of credit is highly likely.

“However we also believe that the company has the cash and borrowing capacity to accommodate this request,” he said in a written statement.

Urdan said the Corinthian example indicates a newly strict approach by the department, particularly with financial management of for-profits. But he said signs do not indicated that the feds would hit ITT with sanctions beyond the letter of credit.

The company probably also has the money to stay afloat even if it does face an aid freeze.

William Blair Equity Research said last week that ITT had made solid strides to resolve questions about its finances and that the company has a “very strong cash and real estate position.”

 

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