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Pondering a Bankruptcy for Education Management

Adam Rust's picture

Posted June 19, 2013

Education Management Corporation, the corporate parent of several private for-profit universities (most notably, the Art Institutes, but also Argosy, South and Brown-Mackie) is bleeding cash.

With approximately 130,000 current students, the collective campuses of Education Management ("EDMC") make up one of the larger university systems in the country.

Although they have experienced a slight drop of enrollment, for-profit schools still teach about eleven percent of our nation's students. Given that this is about a one thousand percent increase relative to their share twenty years ago, their importance cannot be ignored.

EDMC explains their value proposition thusly:

"Although competition exits, proprietary educators serve a segment of the market for post-secondary education that we believe has not been fully addressed by traditional public and private universities. Non-profit public and private institutions can face limited financial capability to expand their offerings in response to growth or changes in the demand for education, due to a combination of state funding challenges, [and] significant expenditures required for research and the professor tenure system. Certain private institutions also may control enrollments to preserve the perceived prestige and exclusivity of their degree offerings. In contrast, proprietary providers of post-secondary education offer potential students the greater flexibility and convenience of their schools' programmatic offerings and learning structure, an emphasis on applied content and an ability to consistently introduce new campuses and academic programs."

But even if they are big, they are not necessarily stable.

In fiscal year 2012, EDMC burned through $305.4 million in cash. That's a problem, because by the end of the year, the company only had $191 million in cash left. In March, that number had dropped to $183 million. But the big problem remains unsettled, as there are lots of debts to be repaid in just a few years.

Right now, EDMC takes virtually all of its operational income and spends it to pay debt. During the last nine months, Education Management generated $286 million in cash from its operations. The company used $287 million just to service their debts.

Still, there are other costs to running a company. They have to some money on keeping their facilities up to date. So if there is going to be a turn around, it will come through new enrollments. New enrollments have dropped almost ten percent. Education Management's schools (The Art Institutes, Argosy, and South) are having trouble, particularly with their online programs.  At the end of March, the company said that it had 129,500 students, of which 32,500 were attending online. But 12 months ago, 147,000 students were enrolled. There are 8,300 fewer online students - a drop of about twenty percent in just 12 months.

Even worse, the students that they have are not paying their bills. Bad debt expense (taken against the allowance for losses that is factored against net income) increased from 5.5 percent to 6.8 percent of net revenue.

As I said earlier, as of March the company says it has about $183 million in cash. Even if they go back to being as profitable as they were a few years ago, they still have trouble because they have to pay a huge debt payment in 2016. The company still owes $783 million on senior secured loan facility which is due in June 2016. After that, it doesn't get much better; they have another $547 million due in 2018 on two different agreements.

The US Department of Education is wise to this situation. ED now requires the company to post a $348.6 million letter of credit. That figure is based upon a formula that says that schools whose financial health does not meet the expectations of ED have to post a credit line equivalent to fifteen percent of total Title IV aid received during the last fiscal year. Otherwise, ED says it won't let EDMC's students take out loans.

Do the math. The company had revenues of $2.76 billion in 2012 and their students paid for it by borrowing approximately $2.3 billion from the government.

This might as well be considered a government sponsored enterprise. But this is an instance where GSE reform seems pretty likely. The Department of Education and the CFPB are all looking at the sector with a close eye. '

This is a situation that has never really been pondered. What happens if a family of universities with more than one million alumni is suddenly no more?