It's a Maturity Issue, Not a Liquidity Issue

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A few weeks ago I agreed to publish Andrew Hermalyn’s response about our recent coverage on the financial crisis at 2U. Reflecting on that post led me to some further research, which has helped my understanding of 2U’s situation and potential path(s) forward. For our new subscribers, the background articles of relevance:

• November 20: Further Thoughts on CEO Chip Paucek's Departure From 2U, which analyzed the news of Paucek leaving 2U and his replacement, the former CFO Paul Lalljie.

• November 30: 2U / edX Facing Additional Existential Changes, which looked at the company balance sheet and noted that it likely could not pay off its maturing debt without a refinance or bankruptcy.

• February 12 (after the company’s earnings call): 2U's Potential End Days Becoming More Clear, which highlighted the company’s disclosure that there was “substantial doubt about its ability to continue as a going concern” as well as a 12-quarter “shrink to grow” strategy.

• February 23 (IHE): 3 Questions for 2U’s Andrew Hermalyn, where Josh Kim email interviewed a company executive, referring to the posts above.

• February 29: Andrew Hermalyn From 2U Responds to Follow Up Questions, the post referenced in the intro paragraph.

With that in mind, the key updates I have are to clarify that 2U’s problems are around debt maturity and not liquidity, and that I believe there is a real turnaround attempt in progress.

Cash Available

When I asked Hermalyn about the drop in cash from $182.6 million to $73 million year-over-year and whether partner institutions should be concerned, he replied:

He is correct that 2U had paid down some of the term loan in question, which affected the cash on hand metrics. I would argue that there is a long-term cash trend that goes beyond paying debt and is a potential cause for concern, but point taken.

According to a document 2U emailed its partners that attended a webinar on February 20th on this subject and coverage, it stated that:

This “liquidity” is their key point - in terms of operating and even paying loan payments (and interest), 2U appears to have sufficient cash for normal business operations.

However:

What the company has confirmed, directly and indirectly, is that it must refinance its term loan that matures in 2025, and if does not succeed, the company would have to declare bankruptcy. That is my key point across these posts - not that 2U will cease to operate, but rather that one way or the other 2U has to deal with that debt outside of normal operations.

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