Summary of Restructuring Issues At Non-Profit and For-Profit Colleges Joe D Angelo 2
Outline Restructuring Issues At Non-Profit and For-Profit Colleges I. Market: Non-Profit & For-Profit Colleges II. III. IV. Title IV Financial Aid What Changed? Key Issues at Non-Profit Colleges V. Restructuring Options at Non-Profits Colleges VI. VII. Key Issues at For-Profit Colleges Restructuring Options at For-Profit Colleges 3
Student Enrollments 25,000,000 Historical Fall Enrollments: Non-Profit vs. For-Profit 20,000,000 15,000,000 10,000,000 5,000,000 0 2009 2010 2011 2012 2013 2014 Total 19,512,692 19,961,484 20,013,265 19,654,586 19,376,781 19,211,145 For-Profit 1,427,871 1,639,196 1,577,290 1,463,097 1,321,107 1,315,167 Non-Profit 18,084,821 18,322,288 18,435,975 18,191,489 18,055,674 17,895,978» Total student enrollments in Non-Profit and For-Profit colleges decreased by only 1.5% since 2009.» However, some schools are experiencing decreases of over 30%.» The increasing number of international students enrolled is helping replace lower domestic enrollments.» Schools compete heavily for international students because they typically also pay full tuition. 4
Title IV Financial Aid Private and Public Tuition Assistance 250 Total Federal Aid Total Non Federal Aid 200 71 74 77 80 83 $s in Billions 150 100 50 79 64 69 76 56 50 45 43 61 67 76 85 90 91 91 100 67 118 153 167 158 153 146 -» Total student debt from federal loan programs exceeds $1 Trillion.» In 2014, over $130 Billion of Title IV Financial Aid was distributed to postsecondary students.» For-Profit college graduates represent about 10% of the total post-secondary students, but account for more than 50% of the loan defaults. 5
Why Are Colleges in Trouble?» Schools are increasing discounts to attract more students, but enrollments keep decreasing and lower net revenue leads to operating deficits that are unsustainable.» In this protracted economic recovery, students are wary about incurring debt and scrutinize the cost/benefit. Students and parents are becoming more informed consumers.» The regulatory scrutiny continues to increase. New federal rules that mostly affect For-Profit schools. Non-Profits also receive warning letters from the Dept. of Education and Accreditors.» The Internet is changing education delivery. MOOCs are early evidence of the technology advances in education. Almost all college students will soon have a meaningful portion of their education delivered online. The Internet disrupted retail, music, advertising and other industries the winners in education will embrace the Internet. 6
Key Issues at Non-Profit Colleges» Enrollments are decreasing because students are losing interest. Rural locations Liberal arts focus Single-sex matriculation Outdated programs and facilities.» Historically Black Colleges and Universities ( HCBUs ) are also struggling due to federal reductions to Title IV programs. PELL programs shortened to six years from eight years. Parent PLUS loans reduced.» Operating deficits and debt service are depleting endowments. Some schools are increasing scholarships (discounts) to attract more and better students which decreases net revenue. Schools have high fixed costs in property, infrastructure and tenured faculty, and many incurred debt to build facilities. 7
Restructuring Options at Non-Profit Colleges 1. Some schools will simply shut down. Orderly shutdown Sweet Briar College Abrupt shutdown South Carolina State University 2. Some schools will limp along and may get lucky or fix it. Likely to be the case for many schools because Trustees are usually unwilling to cut programs and faculty. Only schools with large endowments may be able to get away with this approach. 3. Many will have to take action. Market segmentation, SWOT analysis and strategy to offer programs in high demand with strong job growth forecasts STEM. Cost reduction strategy faculty, facilities, vendors and outsourcing. Invest in student outcomes to increase retention, graduation and job placement. Schools are ineligible to receive Title IV funds in a bankruptcy. 8
Key Issues at For-Profit Colleges» Enrollments peaked in 2010 and are unlikely to reach those levels again. Schools with commodity programs are most vulnerable.» Rapid expansion, enrollment growth and increasing student defaults drew regulatory scrutiny.» EBITDA falls disproportionately to revenue due to under-absorption of fixed cost of faculty, property leases and facilities.» Lack of liquidity is causing defaults on acquisition debt and causing financial responsibility concerns with ED and Accreditors. Letters of Credit are often required by ED for schools with low Composite Scores from debt.» Management is not willing to close poor performing schools. Teachout Costs are prohibitive. Management is reluctant to approach landlords to restructure leases.» Private equity owners are usually not willing to invest more or enough equity because current valuations do not justify the marginal investment. 9
Restructuring Options at For-Profit Colleges 1. Operational restructuring of underperforming campuses. Sell the campuses to a strategic buyer even if for no cash proceeds and an assumption of liabilities. Teach out campuses with the shortest remaining lease period. Restructure property lease portfolio. Streamline campus management and corporate headcount. 2. Financial restructuring of funded debt. Consider converting debt to equity if it improves the composite score and eliminates the need to post LCs. Structure the conversion to avoid a change in control. 3. Sell everything if you don t see the attributes of a turnaround. It is possible that valuations will not improve enough to justify extending credit agreements. 4. Sell the debt to a strategic buyer that would foreclose and take over the schools with ED and Accreditor approvals. Schools are ineligible to receive Title IV funds in a bankruptcy. 10
Success Factors» Improving Retention will increase profits. Both Non-Profit and For-Profit schools lose half their students reducing student drops is a big opportunity.» Innovating is key to staying relevant and competitive. Hybrid programs for flexibility and compressed degrees. Programs that address strong demand from students and employers STEM.» Cost reductions and liquidity opportunities. Back office inefficiencies and lack of fiscal management. Faculty and facilities cannot be treated as sacred.» The Winners will compete on price and quality. Competition will continue to increase. Prospective students will shop more than ever by comparing programs, the cost and debt, and the statistics for placement and salaries of graduates. 11
Real Estate Issues and Challenges 1. Challenges of For-Profit campus property leases 2. Approaches for restructuring leases 3. Market outlook and macro trends 12
Interview on Regulatory Issues Joe D Angelo with Dennis Cariello of Hogan Marren 1. Non-Profit Conversions What are the tradeoffs? 2. New Regulations What is Gainful Employment about? 3. Can Colleges file Bankruptcy? 4. Who is financing Buyers in distressed sales of Title IV schools? 13
Survey on Comparison of Student Performance Joe D Angelo 1. Survey results from Hiring Managers 15
Survey Results Do you consider job candidates who received online degrees equivalent in capability and career potential to those who received degrees as full-time students on campus? Strongly agree Agree Neither agree or disagree Disagree Strongly disagree 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Takeaway» Enrollments are decreasing because students are losing interest. Characteristics of these schools include rural locations, liberal arts focus, single-sex matriculation and outdated programs and facilities. 16
Survey Results Do you believe job candidates who earn degrees from for-profit colleges have similar capabilities and career potential to those who earn a traditional college degree? Strongly agree Agree Neither agree or disagree Disagree Strongly disagree 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%» Enrollments are decreasing because students are losing interest. Characteristics of these schools include rural locations, liberal arts focus, single-sex matriculation and outdated programs and facilities. 17
Survey Results Does your company hire candidates with degrees from for-profit colleges? Yes Sometimes Very rarely Unsure No 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%» Enrollments are decreasing because students are losing interest. Characteristics of these schools include rural locations, liberal arts focus, single-sex matriculation and outdated programs and facilities. 18
Survey Results How would you compare the on-thejob performance of these graduates to graduates of traditional colleges and universities? Outstanding Above average Average Below average 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%» Enrollments are decreasing because students are losing interest. Characteristics of these schools include rural locations, liberal arts focus, single-sex matriculation and outdated programs and facilities. 19
Survey Results Does your company or organization encourage and provide financial support for employees to pursue online degrees from for-profit schools? Yes Unsure Partial Support No Circumstantial 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%» Enrollments are decreasing because students are losing interest. Characteristics of these schools include rural locations, liberal arts focus, single-sex matriculation and outdated programs and facilities. 20
Survey Results Do you feel the per credit tuition that colleges charge for online classes today should be: Unsure The same as in-class learning Non comparable to in-class learning A lot lower than in-class learning A bit lower than in-class learning 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%» Enrollments are decreasing because students are losing interest. Characteristics of these schools include rural locations, liberal arts focus, single-sex matriculation and outdated programs and facilities. 21
Survey Results Do you believe students who graduate from college with significant debt are: More likely to job-hop to get higher salaries Prone to become discouraged about their careers and future prospects No different than those with no loans No different than those with no loan More motivated to earn money to pay off their loans 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%» Enrollments are decreasing because students are losing interest. Characteristics of these schools include rural locations, liberal arts focus, single-sex matriculation and outdated programs and facilities. 22