Dive Brief:

• The U.S. Department of Education has dropped a requirement that Ashford University post a letter of credit in order to continue receiving federal student aid after it separates from its owner, Zovio, according to an SEC filing Tuesday.
• The letter of credit would have been equivalent to 25% of the for-profit, online institution's 2018 Title IV income, or around $103 million, and due within 10 days of the transaction's close. 
• Zovio said in its filing that the department lifted the requirement because of a change in the separation agreement's legal structure.

Dive Insight:

Previously, the LLC that currently owns and operates Ashford University was expected to merge into AU NFP, a nonprofit entity set up to run the school. Last fall, Zovio announced that the department had approved the arrangement in a preliminary review of the transaction, with the letter of credit as a contingency. 

The collateral would have been required until Ashford had two fiscal years of audited financial statements under its new owner, a department spokesperson told Education Dive earlier this year.

The IRS approved nonprofit status for AU NFP in early 2019. Vickie Schray, Zovio's executive vice president and chief external affairs officer, said the IRS won't need to review the new arrangement. 

The university's accreditor also signed off on the inital separation, pending assurance that Ashford's leadership has divested its financial and ownership interests in Zovio. Jamienne Studley, president of WASC Senior College and University Commission, said the agency will not need to review the change.  

Under the new arrangement, Zovio is proposing the LLC transfer the university to AU NFP and effectively become a nonprofit parent entity of AU NFP, according to Zovio, which noted in an email to Education Dive that AU NFP will still own and operate the university. As such, Zovio said in its filing that the department has determined the LLC's financial statements will satisfy its requirement for the historical information, making the letter of credit unnecessary.

"Getting rid of the letter of credit is huge news for the company," said Alexander Paris Jr., president of Barrington Research Associates and whose focus includes the education sector. 

Zovio was hoping to close the transaction last month. It acknowledged in Tuesday's filing that the move had been delayed but said it was still "in its strategic plans." Schray blamed the coronavirus pandemic and its effects on business.

In January, after publicly weighing the option to sell Ashford, executives told analysts that the company was moving forward with the separation and would finance the letter of credit externally, at a cost of around $20 million per year, Barrington reported. 

The letter of credit is an important factor in a change of control transaction. "Part of any purchase or sale of a school is this question of what will the letter of credit requirement be," said Trace Urdan, managing director with investment bank and consulting firm Tyton Partners. 

Amounts tend to run between 10% and 25% of Title IV income, but Urdan said the decision is effectively a judgment call by the department. For instance, the Dream Center was required to post a 10% letter of credit to buy the Art Institutes and Argosy and South universities from the troubled Education Management Corp.

Schray said Zovio is grateful to the department "for entertaining the new information." The company asked the department to reconsider its decision to require the collateral, which led to the change in the transaction structure, she said.

But Yan Cao, a fellow at The Century Foundation, criticized the move as a way for Zovio and Ashford to skirt an accountability measure — the letter of credit — designed to protect taxpayer dollars. The question now, Cao said, is how the LLC will become a nonprofit and separate itself from Zovio. 

Zovio expects to provide ed tech services to Ashford and, eventually, other colleges. Executives told analysts on a call in late February that the company could start courting other university clients later this year.

The U.S. Department of Education did not respond to Education Dive's request for comment about the decision by press time Wednesday.