It turns out that the best intentions can sometimes lead to an unexpected outcome, and sometimes the nature of that outcome is dreadfully bothersome. That would describe how things are turning out in the wake of the Department of Education's order that Corinthian Colleges, Inc. liquidate many of its campuses.
It appears that those campuses will be purchased by Zenith Education, a subsidiary of non-profit student loan debt guarantor ECMC. Once the acquisition is completed, the purchased campuses will then be re-organized under non-profit status. The benefit of that is significant, as a school with a non-profit designation is treated differently under the law. Namely, it helps a school evade recent rules promulgated that were largely designed to thwart some of the worst practices in career training programs at for-profit colleges. The intention had been that these schools, many of which have a track record of creating graduates who cannot find jobs in their field of study, would have to submit to a higher bar for gainful employment rules.
Under the agreement, ECMC's Zenith Education Group subsidiary will buy 53 Everest and 3 WyoTech (brand names of Corinthian schools) campuses as well as some online programs. They will also buy another twelve campuses currently in the "teach-out" process. The price: $24 million. The transaction, which had been planned for this week, is now postponed until February 2nd.
Why would ECMC want to get in to owning college campuses? What's the business opportunity?
Even though ECMC is buying a lot of distressed property, it still could be a good business if it can only be turned in the right direction. Even now, cash flows are sizable. Corinthian has some the most amazing key statistics of all time:
- Price-to-Book: 0.01
- Price-to-Sales: 0.0038
- Price-to-Earnings Growth: 0.07
- Cash on Balance Sheet/Market Cap: 5.0
At this moment, it costs more to hire Clayton Kershaw for 5 nights of work than it would to buy the entire Corinthian empire. On a street with a WyoTech and a KFC, it is likely that the latter business cost more to buy. $24 million is not a lot to pay for half of a company that recorded $1.4 billion in revenue in 2013.
While some have speculated that ECMC will ultimately use its Corinthian platform to create new debt, I've heard from people at Corinthian that this will not be the case. Zenith has said it will not originate loans. Most of Corinthian's student loan debt was already moved off of their books.
But let's not forget...sometimes "it depends upon what the meaning of the word 'is' is." Zenith could honor their promise to not originate loans, but they could still be very involved with the student loans of their students. ECMC Servicing Corporation could still contract to service private loans held by their students. Likewise, their Premiere Credit of North America subsidiary could buy pools of defaulted loans.
Suffice to say, there are more than a few opportunities here for synergies.
Is There Something to Turn Around?
Corinthian claims to fill an unmet need for convenient career-oriented training for non-traditional students. Everything about their curricula reflects that purpose, from shorter courses to urban classrooms and flexible scheduling. Their supporters have a valid point that even if graduation rates are often very low at their campuses, their record of completion is often greater than that achieved by many community colleges.
But the fact that Corinthian is not profitable, even though it costs a lot to go to school there, makes the prospect of a turnaround seem more difficult. Tuition is approximately $400 per credit hour.
ECMC will also have to address a damaged brand. Many graduates report that their degrees have not led to employment. While that is probably not true in fields like culinary arts, it is more of a problem in competitive fields like graphic design. While Corinthian has often challenged those kinds of claims, one proof that supports those assertions is the poor record of repayment on the student loans held by their former customers. In some cases, thirty percent of federal loans originated to their former students go into default in less than three years.
Then there are legal concerns. Corinthian has attracted attention from many different regulators over the years. This is a good summary.
The Department of Education has made a big effort to rein in for-profit schools. There's a certain complicity in play here that makes their interventions necessary. Were it not for the availability of student loans, for-profit colleges could not exist in their current state. There is a maximum share of revenue that can be drawn from federal education dollars, and many non-profits operate at the absolute frontier of those caps. The re-writing of gainful employment rules was designed to hinder the for-profits. But now we have a real Lemony Snicket. Not only will those gainful employment rules be dodged by virtue of non-profit status, but the new owners will be even more heavily dependent upon student loan revenues. The Old Corinthian earned revenues from the proceeds of student loans. The new Corinthian gets paid with money from student loans, collects on repayments of those student loans, and then collects on bad debts if those loans default.