November 5, 2012 / 7:00 PM / 5 years ago

UPDATE 1-Corinthian's low financial score may jeopardize federal student aid

* Corinthian says Education Dept. calculated a score of 0.9

* Minimum threshold needed for Title IV student loan program is 1.0

* Company may be forced to issue letter of credit if score not revised

* Shares down as much as 10 pct

By Bijoy Anandoth Koyitty

Nov 5 (Reuters) - Corinthian Colleges Inc said the U.S. Department of Education gave it a financial responsibility score that falls below the minimum requirement the company needs to allow its students access to federal student loans.

Shares of the company, which has a market value of $235 million, fell nearly 10 percent to $2.45 on the Nasdaq on Monday.

Financial responsibility ratios - measured by equity value, net income and cash reserves - are used by the department to determine whether an educational institution has the financial resources to participate in Title IV funding, a type of student loan.

Corinthian said the department calculated its composite score for the 2011 financial year as 0.9, below the minimum threshold of 1.0 needed for the Title IV program.

However, Corinthian said its calculations showed it had a composite score of 2.1 for 2011, excluding a $203.6 million goodwill impairment charge it took in the year.

Corinthian, which derived almost 85 percent of its revenue from Title IV for the year ended June 30, has said it is focusing on developing other federal sources of revenue.

Enrollments at Corinthian have taken a hit since the U.S. government started a crackdown on for-profit colleges for high student debt.

Corinthian, parent of Everest College, said the discrepancy in the score rose due to the Education Department’s position regarding treatment of the goodwill impairment charge and certain other items.

If the company is unable to convince the department to reconsider its score, Corinthian will be forced to post a letter of credit with the department equivalent to at least $175.7 million, depending on the level of monitoring it is willing to accept.

The company said there was no assurance that it would be able to meet these obligations, failing which its 92,000 students could lose access to federal student aid.

“If they have to post a letter of credit ... it is going to be a very tight liquidity situation for the company,” said PAA Research analyst Bradley Safalow, who recommends investors sell or short the stock.

“They have been doing everything possible, between selling assets, selling student loan receivables, and creating a quasi private student loan arrangement, to preserve their working capital and enhance liquidity,” he said.

“In our view, they are running out of levers to pull.”

Corinthian said in May it would sell four Everest campuses and shut down three campuses to reduce debt default rates. In June, it said it would sell two of its WyoTech campuses over the next 12 months.

2012 AUDIT

Corinthian also said a failure to maintain at least a 1.5 score could constitute a default under the terms of its credit facility.

The company said its preliminary calculations for fiscal 2012, ended June 30, indicate a score of 1.5 and said it has asked the department to consider this fiscal year for its financial responsibility score.

The for-profit college operator is yet to file its compliance audits and financial statements, which it expects to do within “several weeks”, and said the department has agreed to an expedited review of the submission.

However, analyst Safalow said if the government took a different view than the company’s calculations, Corinthian could still end up having to post a letter of credit.

Santa Ana, California-based Corinthian said officials from the Education Department have agreed to meet and discuss the issues with the company. It is also in discussions with its lenders.

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