ITT Educational Services: The Equity Is Worthless Update

Matt Brice profile picture
Matt Brice


  • Recent actions by the Department of Education will force ESI into bankruptcy within weeks.
  • No incoming students and cancellation of fall classes.
  • Department of Education surety request of an additional $150m is unattainable for ESI.

This past week, on August 25, the Department of Education, sent this letter, to ITT Tech's (NYSE:ESI-OLD) CEO, Kevin Modany. Last May, I wrote that the equity of ESI was worthless. It took a little over a year, but within the next few weeks, ESI will file for bankruptcy and effectively end the operations of ESI as an ongoing business.

The two key points from the letter are as follows:

1. ESI is no longer allowed to enroll students who use Title IV funding, i.e. federal loans. Given that ESI received approximately 70% of its revenue from Title IV funding in its previous academic year, this cuts off the majority of any new students seeking to enroll.

Although ESI does not disclose this, I suspect that each student uses Title IV funding for some portion of their payments and therefore this limitation would eliminate ESI from enrolling any prospective students.

Further to this point, ESI has ceased not only new enrollments for incoming Title IV students, but for any students (which supports the idea that all of their students receive some sort of Title IV funding).

Additionally, based on my calls to schools in a few different states, ESI has cancelled its Fall semester for all returning students, not merely the new students (something that goes beyond the requirements of the DOE letter from August 25).

2. The DOE requires that ESI put up an additional $150m in surety or letter of credit to assist "with any liabilities that would be owed to the Department of Education, such as those that may trigger should the institution precipitously close or terminate classes at other than the end of an academic period."

ESI currently has approximately $75m of cash on its balance sheet. This additional $150m will be impossible to come up with in the

This article was written by

Matt Brice profile picture
The Sova Group is a private investment fund managed by Matt Brice. As principal of The Sova Group, Matt Brice has been managing investments since 2009. Prior to founding The Sova Group, from 2007 until 2009 he worked as an associate attorney in the Mergers and Acquisitions group of Debevoise & Plimpton LLP, an international law firm based in New York City. Mr. Brice holds a B.A. in Philosophy from Brigham Young University and received his law degree from Columbia Law School.

Disclosure: I am/we are short ESI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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