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The messy unwinding of Corinthian Colleges was an unprecedented dance among various actors: the U.S. Department of Education, state attorneys general, the Consumer Financial Protection Bureau and buyers like ECMC’s Zenith Group -- not to mention members of Congress and student and consumer groups.

But another, far less visible, entity also had a strong interest in and influence on the outcome: Bank of America and a handful of other banks.

The extent to which those institutions, which lent money to help keep Corinthian afloat, were involved in managing the for-profit college giant as it hurtled toward ruin is becoming clearer in the company’s ongoing bankruptcy proceedings. And it highlights the significant power and influence banks that lend to for-profit colleges are increasingly wielding over those institutions, especially as many companies in the industry face greater cash flow problems and stiffer regulatory scrutiny.

Banks’ Role at Corinthian

In the Corinthian case, two state attorneys general have formally raised questions about the extent of Bank of America’s influence over Corinthian during the events leading up to its bankruptcy. California's Kamala Harris and Massachusetts' Martha Healey told the bankruptcy judge that they wanted more information about whether the $18 million that Bank of America and other lenders received from the Zenith sale could or should be available for the company’s creditors, including students and possibly the states.

A bankruptcy judge dismissed those concerns last month when he took the first step in approving Corinthian’s liquidation plan and put the proposal to a vote of the company’s creditors in the coming weeks. Still, the documents in the case reveal the influence wielded by Bank of America and other lenders as Corinthian collapsed and was, controversially, sold off to Zenith.

When the Education Department delayed Corinthian’s access to federal funds in June 2014, sparking a cash flow crisis, the company turned to its lenders for an immediate $9 million loan. The group of banks, led by Bank of America, agreed to provide the funds but required Corinthian to appoint a “chief restructuring officer” of their liking and give the banks final say over the company’s future agreements with the Education Department.

For much of last fall and winter, the Education Department was scrambling to orchestrate the sale of most Corinthian campuses in order to avert the immediate collapse of the company and the displacement of tens of thousands of students and billions worth of loan discharges.

The banks also, according to court testimony, were heavily involved in the sale of Corinthian campuses. They received updates on the company’s talks with the Education Department within 24 hours, were informed of potential bidders before the general public was and reviewed draft sale agreements.

“They expressed their view that they wanted to be repaid,” William J. Nolan, the restructuring consultant hired by Corinthian, said in court testimony. He added that “interactions with the Department of Education or otherwise was making it difficult” for that to happen.

In the end, Corinthian’s lenders signed off on the sale of much of the company to ECMC’s Zenith Group last fall, agreeing to let some of the sale proceeds go to the Education Department and a student refund account.

Bank of America and other lenders shared in $18 million as a result of the sale, according to court testimony. The Education Department received $12 million up front that it said would be used to help students. The department is slated to receive an additional $17 million payout over the next seven years, though a department official said it has not started receiving any of that money.

The student refund account, which under the agreement was supposed to be $30 million, was used for at least $8 million in refunds and had a remaining balance of $4.3 million when Corinthian went bankrupt. That money is slated to go to a committee of former Corinthian students under the bankruptcy plan pending before the court.

(Separately, the CFPB negotiated $480 million worth of private debt relief for former Corinthian students, funded by ECMC, in exchange for not holding Zenith responsible for liability stemming from its lawsuit against Corinthian.)

The sale was widely panned by consumer and student groups, some of whom argued that it would have been better for the campuses to simply close and students to receive the loan discharges available to borrowers whose colleges shut down.

The banks, which were owed roughly $100 million by Corinthian, apparently weren’t thrilled with the arrangement, either.

“It wouldn’t have been their first choice,” Nolan said, in court, of that arrangement. “And I can’t speak for them, but they had a view.”

Still, had the banks not signed off on the sale, and forced Corinthian into bankruptcy earlier, they might have stood to recoup even less of what they were owed. Corinthian’s cash on hand at the time of the bankruptcy was only about $6 million.

An Education Department official, who declined to be named, said that the department did not communicate or negotiate with Bank of America or other lenders about the Zenith sale. The department declined to comment about any ongoing discussions with the lenders. 

At Anthem, a Quick Campus Sell-Off

Banks and other lenders also played an outsize role in the recent collapse of another large for-profit college chain, Anthem Education.

In March 2014, the Education Department temporarily suspended Anthem’s access to federal funds over concerns the company had improperly received millions of dollars. That exacerbated financial problems at the privately held company that had been mounting for years, according to court filings.

Anthem’s lenders, led by Bank of Montreal, stepped in to provide some of the cash the company needed to repay the Education Department the improperly obtained funds -- a bill that eventually totaled $17 million -- and to provide working capital for other parts of the struggling business, according to filings from various legal cases.

In exchange for the infusion of cash, the lenders required Anthem to hire a chief restructuring officer with whom Bank of Montreal, the chief lender, would maintain “direct access.” And several months later, under the direction of that chief restructuring officer, Anthem sold off some of its Florida Career College campuses to International Education Corporation just days before filing for bankruptcy.

As a result of the sale, tens of thousands of students were able to continue their studies under a new owner. But, as some consumer advocates and for-profit critics have noted, the students would have been eligible to have their federal loans wiped out completely had their campuses gone into bankruptcy and closed.

Anthem’s restructuring officer, Sean Harding of FTI Consulting, wrote in court testimony that Bank of Montreal, the company’s other lenders, its stockholders and the U.S. Department of Education all “worked together” to sell off the campuses immediately before the bankruptcy. He said it was “the best available option” for the company, would avoid layoffs and would allow students to continue their education.

The sale of the campuses also brought an immediate financial benefit to Anthem’s lenders, which received an up-front $1 million fee as part of the transaction, court filings show. Once the assets of Anthem’s remaining campuses were divided up in bankruptcy court, the company’s lenders were able to recoup only a few million more dollars out of the $50 million they were owed.

Other For-Profits

When it comes to for-profit education companies that aren’t in as dire financial condition as Corinthian and Anthem but are nonetheless struggling, banks and lenders can still be extremely influential in how those companies are run.

Companies like ITT and Education Management Corporation have turned to lenders to help them post letters of credit required by the Education Department when it has concerns over a company’s finances or management.

“The lenders are exercising more control in these situations,” said Trace Urdan, a for-profit industry analyst, most recently with Wells Fargo. “They get to dictate terms, impose additional restrictions on management.”

Many of those terms try to keep the company in line with existing Education Department rules. In fact, nearly all lenders' agreements with major for-profit colleges say the college will default on its obligations if the Education Department uses nearly any tool in its regulatory arsenal against the institution -- imposing heightened cash monitoring; suspending, terminating or limiting access to Title IV; not approving a new campus. Some also set a threshold -- like 10 or 20 percent -- for the share of campuses that can fail the Obama administration’s gainful employment standards without defaulting on their agreements.

Ben Miller, a former Education Department official who is now senior director for postsecondary education at the Center for American Progress, said he was concerned that some of those debt agreements were attempts to tie the department’s hands when it comes to taking action against a for-profit college.

“The covenants being written into some of these debt agreements are essentially veiled threats at the department,” he said. “They make it so there is no way the department can’t act blindly.”

The Education Department says it monitors the agreements that colleges have with their lenders as part of its annual review of whether a college is meeting financial responsibility standards.

Asked whether the debt agreements factor into enforcement decisions, a department official said that the department “takes required oversight action based on the violation of the regulations and risk associated with violation.”

Some nonprofit colleges running into trouble with debts have struck agreements with their lenders that have the effect of giving lenders greater control over the affairs of the college. Those agreements, however, appear far less sweeping and complex than some of the debt agreements -- and renegotiated agreements -- that for-profits make with their lenders, which are typically commercial banks.

Lenders to any company typically place conditions on the capital they pump into the business. If a business can’t meet those conditions or repay the money, the lenders will come after them for it, even if that means pushing them into bankruptcy.

But for-profit higher education companies are unusual, experts said, because the usual safety valve of bankruptcy isn’t a viable option because federal law says that a college that enters bankruptcy is permanently banned from accepting federal student aid money, on which most for-profit colleges rely heavily for revenue.

“For lenders, exercising their rights against schools is a self-defeating act,” said Urdan. “The lenders will stretch and stretch and stretch beyond the point that they would in any other circumstance because the underlying asset becomes worthless if the school declares bankruptcy.”

That dynamic has led some in the for-profit industry -- and the lawyers who represent the colleges in it -- to call on Congress to ease the prohibition on federal loans and grants going to colleges that have declared bankruptcy. The argument is that troubled colleges should have the option to restructure in bankruptcy without permanently ending their business.

Short of that law changing, though, lenders are going to great lengths to avoid colleges entering bankruptcy: they’re renegotiating their agreements with the colleges and granting forbearances in exchange for concessions from management.

“It means that they have a very powerful voice at the table,” Urdan said. But, he added, when the prospect of bankruptcy is imminent, “at some point they go from trying to do whatever they can to keep the company out of bankruptcy to grabbing as much money as they can.”

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