ITT Educational Services (ESI) Says Chubb (CB) Demands Company Post $19.8M in Collateral

September 1, 2016 1:51 PM EDT

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ITT Educational Services (NYSE: ESI) disclosed it received a letter from Chubb (NYSE: CB), whereby Ace American Insurance Company, on behalf of itself and the other insurance companies (the “Sureties”) named in the Agreement of Indemnity entered into by the Company on August 19, 2003 (the “GAI”), makes demand on the Company to post collateral in the amount of $19.8 million (which is equal to 100% of the outstanding amount of the Surety Bonds (defined below)) in the form of an acceptable irrevocable letter of credit. The GAI had been entered into by the Company to induce the Sureties to execute surety bonds for the Company from time to time that are required by various education authorities that regulate the Company (the “Surety Bonds”).

In connection with the Chubb Letter, Chubb also provided notice that it plans to issue notices of cancellation on all of the Surety Bonds, starting with the largest first. Most of the Surety Bonds contain a 30-day cancellation provision. Chubb indicated that the cancellation notices are rescindable should the Company demonstrate that it will be able to operate in a fiscally responsible fashion in the absence of federal student financial aid as noted in the U.S. Department of Education’s (“ED”) letter to the Company of August 25, 2016, in addition to the additional security the Company is required to post to the ED. If the Surety Bonds are rescinded and the Company does not maintain an acceptable surety bond for those ITT Technical Institutes where a surety bond is required, the certificate or license for those ITT Technical Institutes can be suspended, invalidated or revoked by the applicable state education agency.

The Company is currently reviewing this demand and its potential impact on the business.

As disclosed in a Current Report on Form 8-K filed by the Company with the Securities and Exchange Commission on August 26, 2016, the Company received a letter from the ED (the “ED Letter”) on August 25, 2016. The ED Letter imposed a number of new sanctions and requirements on the Company, including, without limitation, requiring the Company to provide an additional surety amount of $152.9 million to the ED within 30 days, subjecting the ITT Technical Institutes to the Heightened Cash Monitoring 2 method of payment under the federal student financial aid programs under Title IV (the “Title IV Program”) and restricting all ITT Technical Institutes from enrolling or beginning classes for any new students who may receive Title IV Program funds. The Company is continuing to evaluate all options available to it related to the ED Letter, and has contacted the ED to request that the ED consider possible alternatives to the ED’s positions and requirements as stated in the ED Letter. The Company cannot provide any assurance that the ED will respond to the Company’s requests in a favorable manner or at all.

The ITT Technical Institutes generally operate on an academic schedule for education programs of study on the basis of four 12-week academic quarters in a calendar year, with new students beginning at the start of each academic quarter. The scheduled last day of classes for the current academic quarter is September 2, 2016, and the ED Letter did not have any impact on the completion of that academic quarter by ITT Technical Institute students. The next academic quarter for the ITT Technical Institutes was scheduled to begin on September 12, 2016. However, because only a small number, if any, of students who typically enroll in the ITT Technical Institutes would not be eligible for Title IV Program funds, the ED’s restriction on the ITT Technical Institutes enrolling or beginning classes for any new students who may receive Title IV Program funds effectively precludes ITT Technical Institutes from enrolling any new students. As a result, the Company currently is not enrolling new students at any ITT Technical Institute for the academic quarter that begins on September 12, 2016. Additionally, the Company has received notices from several states as a result of the ED Letter, further prohibiting it from enrolling new students for the academic quarter that begins on September 12, 2016, but as the Company has already suspended enrolling new students, those notices have not had any additional impact on the Company’s operations.

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