When the federal government cited Chicago’s Kendall College as one of the five most financially distressed schools of higher education in the country, it raised an obvious question: What about that turnaround?
After a long period of financial difficulty, Kendall declared itself turned around years ago. So imagine the surprise last month when it showed up on a Department of Education list with the lowest possible failing grade in a "financial-responsibility test" analyzing debt load, resources and income-to-expense ratio as of June 2008.
In the intervening year, the school best known for its prestigious culinary-arts and hospitality program has, when it comes to money, finally gotten itself out of the woods, said President Nivine Megahed. Enrollment is soaring, and its acquisition last summer by the for-profit Laureate Education Inc. has taken the heat off its finances. After years of losses, the school is operating at break-even or slightly better, she said.
"There’s nothing to worry about now," Megahed said.
Kendall’s shifting financial picture illustrates the lack of information available to outsiders for assessing the fiscal state of private colleges and universities. That’s especially true of small schools generally ignored by credit-rating agencies.
Students in a money-losing program bear part of the risk: A sudden shutdown could leave them with no useful credential and a hefty bill to pay.
The failing financial grade forced Kendall to post a letter of credit for federal loan access, but that was a formality given its recent resurgence, Megahed said. Meanwhile, she is thinking big: She plans to expand academic programs and launch a $1.5 million commercial-kitchen upgrade in the coming year. "The path is clear," she said.
It’s a big improvement from August 2006, when the psychology PhD and veteran educator took over Kendall from Chicago entrepreneur Howard Tullman. The profit-and-loss statement "was still in deep trouble," she said. "They had bit off a lot."
It had sold its campus in north suburban Evanston for $10 million, she said, and taken on tens of millions in debt to finance the move to its location on Chicago’s Goose Island, where it has more room to grow. Crucially, it struck a deal with Laureate in 2004 that provided operating funds in exchange for an option to buy the school.
Kendall lost $12 million in fiscal 2006, $8 million in ’07 and $4 million in ’08 before reaching break-even this year, she said. Enrollment tripled to 1,500 in the first two years after she arrived.
The school always held a solid market niche, and as operations improved, students poured in, said Tom Ehrhardt, an ex-General Motors executive who serves as vice president of marketing. "Kendall has a strong brand."
But at the same time that Kendall is looking up, its parent is under pressure. Standard & Poor’s has a negative outlook on the privately held Laureate’s extensive debt — $2.7 billion as of fall 2008, according to analyst Hal Diamond.
"We’re wary," Diamond said. "It’s a high-risk, high-leverage situation. They are dependent on fast growth to grow into their debt burden."
Even so, with more than 500,000 students worldwide, it’s a "fairly sizable" company not contingent on the performance of "one school in Chicago," he said.
Laureate spokeswoman Debra Epstein voices no worries about Kendall. "We see it as on track and meeting expectations," she said. "Kendall has dramatically turned the corner." (Chicago Tribune)