ITT Educational Services: The Equity Is Worthless Update

Summary

• 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 next 30 days as required by the DOE.

The other points or requirements from the letter are minor in comparison to these two.

Given that ESI currently has the following two outstanding debts: Cerberus: $35m; CUSO and PEAKS Loan Programs: $145m, the equity is worthless.

In other words, ESI has been effectively cut off from continued operations. Without incoming revenues, you do not need to fiddle around with the balance to see that the company will file for bankruptcy within weeks as its creditors begin to fight over the carcass.

It will be a three-way battle between the DOE (on behalf of current and former students), PEAKS and CUSO Loan programs (approximately $145m in debt) and Cerberus, the original Hound of Hades, or in this case, the distressed debt lender, Cerberus Capital that is still owed approximately $35m.

The DOE letter requires a response by September 6, so I imagine that we will see a bankruptcy filing before that date. Additionally, I suspect it will be a Chapter 11 filing that will eventually convert to a Chapter 7 to liquidate the remaining assets among its creditors. In the end, the equity will be worthless and ITT Tech will never reopen its doors.

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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.