Here are the highlights from their 4Q 2009 earnings call today which provide insights as to regulatory environment and bad debt trends in the for-profit sector (thanks to Seeking Alpha for the transcript of the call):
Growth in new students was quite strong for the quarter and the year, although the company tamped down expectations for 2010:
"At the end of the fourth quarter our total student population was 86,088, an increase of 24.4% over the same period last year...Moving now to guidance for the full fiscal year, we expect start growth of approximately 10-12%."
The company identified recent positive legislative and regulatory changes including increases in Pell Grants, 90-10 relief and increased grants for workforce training. Company believes any changes related to upcoming negotiated rulemaking will be "incremental" in nature:
"Based upon our own interactions with the new leadership and other key DOE officials there is nothing to suggest that the Department’s regulatory agenda is designed to put any particular type of school or sector at a disadvantage.
Several weeks ago I had the opportunity to meet with Robert Shireman, Deputy Under Secretary for Post Secondary Education and we reinforced the administration’s commitment to ensuring that all students at all types of institutions have access to effective, post secondary education and that the tax payers are well served in the process.
As you may recall, in May the Department of Education issued a Federal Register Notice which listed several issues it planned to study for possible modification to its regulations. Subsequent to the notice, the DOE held public hearings soliciting ideas and opinions with respect to those issues or others the public deemed important to consider. We monitored the hearings which were largely uneventful and provided written and oral testimony to the Department. We expect a negotiated rule making committee to be formed during the next few weeks around the issues identified in the Federal Register Notice and as is the DOE’s practice, we expect our sector to be represented on that committee.
In short, the regulatory process is moving forward as expected at a measured and deliberate pace. We expect any regulatory changes emanating from negotiated rule making to be incremental in nature. In addition, any new regulation coming out of the current process would not go into effect until fiscal year 2011 at the earliest."
On the placement front, the company has seen declines in placements and is responding by increasing their career services staffing:
"Our placement rate for the 2008 Cohort of graduates was 78.1%, down from 83.7% the previous year. To achieve this solid result we increased our career services team by more than 1/3 and now have more than 600 individuals working to ensure an ongoing student employment opportunities to our graduates."
This issue of career services has become a "hot button" issue in the for-profit world with the Fort Worth Star-Telegram reporting this evening that former Everest College students (Everest's parent is Corinthian College) are suing the college for "accusing it of misrepresenting job placement rates, the quality of education and the ability to transfer credits to four-year nonprofit universities." Everest's response:
"Everest College officials said those programs offered at its campuses in Arlington, Fort Worth and Dallas are specialized career offerings whose credits may not transfer. That information is disclosed to students repeatedly before they enroll, Dom Montalvo, regional vice president of operations, said in a statement. He also said, "Everest provides extensive career placement assistance, but no school can guarantee employment."
Regarding credit trends with their internal lending [institutional loan] program, losses are even greater than the 50% originally projected (this was also reported in a recent AP article):
"I will now turn to a discussion of our internal lending program which we now refer to as our Genesis Discount Lending Program. As a reminder, we launched this program in March 2008 to replace the [GAAP] financing previously provided by Sallie Mae and other third party lenders. Under this program we lent students approximately $120 million during fiscal 2009 and expect to lend approximately $130 million in fiscal 2010. As discussed on previous calls, the expected defaults associated with our Genesis Discount loans are reported as a discount to revenue.
At the beginning of fiscal 2009 we estimated our loan discount would be approximately 50% based upon the projected mix of our student’s credit scores. We now have nearly 18 months of data associated with these loans and our analysis indicates that we are experiencing a mix shift towards students with lower credit quality. Given the length and severity of the recession this is not unexpected and it is not unique for our students.
According to Fair Isaac Corporation, FICO scores are declining for most consumers across the U.S. The average credit quality of our students has declined as well. Based on our internal analysis, in the fourth quarter we adjusted the Genesis loan discount to approximately 55% for the full fiscal year. In fiscal 2010 we expect the projected mix of credit scores to deteriorate further. Thus, we forecast the Genesis Loan Discount will increase from 55% to a range of 56-58%. We have included the increased discount associated with that loan program in our fiscal 2010 guidance which I will review in a few minutes."
Meanwhile, the company indicated that preliminary results indicate several of their schools will exceed a 25% cohort default rate for their 2008 cohort [company indicated during their Q&A session that it was five of their forty schools that would be in that category]:
"This preliminary data indicates that some of our institutions will have a 2008 cohort default rate above 25%. Under current rules, institutions exceeding a cohort default threshold of 25% for three consecutive years could become ineligible to receive Title IV funding. We want to emphasize we do not expect any of our schools to exceed the 25% threshold for three consecutive years. To reduce cohort default rates, we are redoubling our efforts investing additional resources at the corporate and campus levels as well as externally."
Company doesn't expect any surprises during the upcoming negotiated rulemaking process which was a point they emphasized again during the Q&A:
"As I said, everything we hear would be incremental as opposed to anything new coming out of that. So I think you won’t see any surprises at least as far as we know at this point other than what we heard during those sessions. I think it is going to be pretty straight forward. They have been following their process as they have had in place for every one of these negotiated rule making events over the last several years. We really don’t anticipate anything untoward coming out of that."
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