When 2U filed for bankruptcy last week, court filings show it owed tens of millions of dollars to universities around the country.
The online program manager, which works with colleges to develop and maintain online programs and owns the MOOC company edX, filed for Chapter 11 bankruptcy after recent years of flagging demand and a heavy debt load.
Paying its university clients and other business partners is critical to 2U continuing through the Chapter 11 process and beyond, and the company has made payments a priority in its restructuring plan.
Failing to do so could harm the company’s relationships and, ultimately, its business prospects in Chapter 11 and beyond. As the company put it in a court filing, not meeting its obligations to university clients could mean “losing market share, harming [its] future business and revenue growth.”
The company’s restructuring plan calls for paying its customer obligations and vendors in full, and it has $64 million financing lined up from lenders to support that aim during the bankruptcy process. On Tuesday, the company won court approval to pay what it owes clients on an interim basis, up to $8.2 million, and expects to pay the rest in full pending a final court order.
The money the company owes the higher ed sector provides a snapshot of its business at the time that it filed for bankruptcy.
As described in court papers, 2U estimates that it owes a total of $20.8 million to university partners in its degree programs business. These are clients that have tapped 2U to help them run and maintain online programs. 2U often pays the upfront costs to help get online programs off the ground in exchange for a cut of their tuition revenue.
The bulk of what it owes clients, $15.6 million, is for “degree program commitments” — the payments 2U makes to its clients to help offset the upfront costs they face to launch online programs. These payments are often tied to certain milestones in the programs 2U develops with universities, such as launching the offerings within a certain time period.
Honoring those commitments is crucial for maintaining “customer relationships and preserving the value of the Degree Program Segment,” the company said.
Also included are royalty payments 2U owes certain university customers with programs “substantially similar” to offerings it helps run with other clients, the company’s share of bad debt from students who haven’t paid tuition, reimbursements to universities to cover “immersion” experiences such as in-person events and travel, and some miscellaneous payments to clients.
For the purposes of the case, 2U’s obligations to university customers are treated as unsecured claims, which the company plans to pay off in Chapter 11. Some of the company’s university partners were among its largest unsecured creditors at the time of filing, as were vendors such as other tech and education-focused companies.
The company expects $5.2 million of what it owes its degree customers to come due within 30 days of its filing. It can pay that amount under the recent court order. It will need final court approval to pay the full $20.8 million it expects to owe over the course of the bankruptcy process, which 2U hopes to wrap up in September.
Nicole Serrano, vice president and senior credit officer for Moody’s Ratings, said the company’s Chapter 11 filing isn’t expected to affect the colleges it rates in the short term.
“Should 2U be unable to provide its contracted service, universities may face significant costs to maintain online education, though this is mitigated by existing infrastructure post-pandemic and the presence of alternative OPM providers,” Serrano said in emailed comments Monday.
2U also owes some colleges money tied to the development of alternative credentials.
These are institutions that develop or approve content for programs like the company’s coding bootcamps. Dubbed “alternative credential providers” in 2U’s Chapter 11 filing, the colleges are among the vendors the company is prioritizing paying in bankruptcy.
All told, 2U owes its critical vendors $30.9 million. It is looking to pay off those creditors as well.
In addition, 2U estimates that it owes around $3 million to settle accounts it has with clients of its alternative credential program, including for refunds.
