Nearly $401m in CMBS backed by for-profit colleges at risk: Morningstar

A government crackdown on a for-profit college accreditation agency last month has increased the default risk of $400.6 million in CMBS loans backed by for-profit colleges, a new report from Morningstar Credit Ratings shows.

A government crackdown on a for-profit college accreditation agency has increased the default risk of $400.6 million in CMBS loans backed by for-profit colleges, a new report from Morningstar Credit Ratings shows.

studenthousing_2669751bThe move by the US Department of Education to terminate its recognition of the Accrediting Council for Independent Colleges and Schools (ACICS) may force some for-profit schools to cease operations; students may lose their federal financial aid, elevating the risk of “tenant bankruptcies and subsequent lease rejection” on colleges previously accredited through ACICS, the report shows.

The agency has identified 13 loans backed by 11 properties that are accredited by ACICS, with an allocated property balance of $400.6 million, that face the greatest risk of default. These loans either have a debt ratio below 1.2x or the vacancy rate would fall below 80 percent if the for-profit education tenant were to vacate. Overall, there are 19 loans in CMBS with exposure to for-profit colleges that are accredited by ACICS, with a balance of $549.5 million.

While most loans backed by these for-profit companies are not at risk in the short term, because the schools will have 18 months to find a new accreditor after ACICS, they might run into difficulty receiving accreditation from another agency in the long term, potentially facing a “fatal halt in federal funds.”

The report also noted that all for-profit schools “are under fire from the federal government for dismal career placement and high student loan defaults,” resulting in some for-profit brands shutting down, like Corinthian Colleges, and hundreds of locations closing their doors nationwide.

Most recently, the for-profit college company ITT Educational Services Inc. closed all of its campuses in September, impacting at least $123.1 million in CMBS.

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