Almost two years after talks began for a nonprofit affiliate of the University of Arkansas System to buy the for-profit University of Phoenix, financing has not been secured for the deal, a system spokesman said today.

Also late today, UA System spokesman Nate Hinkel confirmed that a special board of trustees meeting is likely later this week, perhaps Wednesday, to address “three Systemwide … items that can’t wait until” the next regularly scheduled meeting in May. Further, he said that “given the high profile of the potential affiliation with TES, an informational discussion also is planned.”


Hinkel said he expects to have details on the meeting’s timing Tuesday.

Hinkel said earlier today that UA System President Donald Bobbitt and Michael Moore, the system’s vice president for academic affairs, “have both said all along that it’s been the plan to seek board support, like it is on any project, but especially one of this magnitude.”

Earlier this year, Cliff Gibson III, then chairman of the UA System’s board of trustees, said Bobbitt had told him that a Japanese bank would provide financing. Gibson, whose board term has since ended, did not know the bank’s name.


But in an email today, Hinkel said, “Financing is not secured, but they are working to find the most beneficial option. I don’t know about provisions and would guess that any information about that would not be disclosed in the middle of negotiations for competitive advantage reasons.”

Hinkel added that “there are many experts doing due diligence and working toward the best outcome for all parties. But also, as we can’t say enough, the UA System will not use any public funds and is not at any risk in this potential affiliation.”


In February, Hinkel stressed that the talks are “an ongoing potential negotiation and many options and details are subject to change. It’s premature to comment on any of the details at this point. I suppose it’s also possible that there is more than one financing option that is being considered.”

Further, the nonprofit affiliate, Transformative Education Services Inc. or TES Inc., was not created until August of last year. The proposal is for TES Inc. to buy the for-profit University of Phoenix and gradually convert it to a nonprofit university. Phoenix would not become a part of the UA System.


The Washington Post recently reported that the nonprofit is working with international banks but that Bobbitt would not disclose their names. He also confirmed to the Post that the Arkansas Times’ previous report that the acquisition would cost at least an estimated $500 million was accurate.

Indeed, there’s a reason the UA System is looking beyond the United States for financing.

“A lot of U.S. banks now decline to loan money to [college and university] for-profits ,” explained Neil Lefkowitz, a Washington, D.C.-based attorney with expertise in college mergers and acquisitions. Lefkowitz, who is not involved in the UA System proposal, told the Times that “a lot of banks have lost tens or hundreds of millions of dollars” from such loans in the past.


Lefkowitz said there’s another important factor in any purchase of the University of Phoenix, one of the nation’s largest online colleges. That frankly complex issue comes down to five words: borrower defense to repayment claims. And they could come down to millions of dollars in costs to whoever at the time owns the 79,000-student, predominantly online University of Phoenix, currently owned by Apollo Global Management.

Despite the $500 million sum, Lefkowitz said he would guess Phoenix couldn’t expect more than $200 million as a purchase price considering its “diminished valuation.” Lefkowitz also cited the student borrowers’ unresolved claims, Phoenix’s regulatory problems and its huge decline in student enrollment — tens of thousands.


Referring to the borrower claims, Lefkowitz said, “I do regard it as a major issue,” but not enough of one alone to say the proposed purchase of Phoenix should be shut down. “It [Phoenix] has accreditation, very good programs and” a good faculty, he said.

Indeed, the purchase effort is still moving forward, despite a U.S. Supreme Court decision last week that refused to block a $6 billion settlement in a student loan case affecting many for-profit colleges, including Phoenix, and about 200,000 borrowers.

In an email after that ruling, Hinkel said, “Dr. Moore and those involved
feel that the level of due diligence done by many experts [has] taken borrower defense into consideration and that it is not a barrier in reaching the finish line on an affiliation.”

Arkansas was among the 20 states that had challenged that settlement in the case known as Sweet vs. Cardona.


The case centered on a federal rule known as borrower defense. That rule allows federal student loan borrowers to ask the U.S. Department of Education to erase their debts if a school has lied to them — about their job prospects, their credits’ transferability or their likely salary after graduation, NPR has reported.

According to the Education Department, 48,890 claims from former Phoenix students were pending as of Jan. 26, and there could be more. There’s no dollar estimate yet on what the potential Phoenix tab might be.

Lefkowitz suggested that the claims should result in a lower sale price for Phoenix since TES Inc. might have to make payouts as a result of the borrower defense claims. “I’m sure the purse price will be affected” by those claims, he said.

Bobbitt has said one of the proposal’s attractions is that one or more licensing agreements could yield roughly $20 million annually for use by the UA System. Licensing agreements allow approved usage of certain brand names and images.

Because the UA System “is very underfunded compared to [universities in] other states,” Lefkowitz said, the licensing income makes the proposed deal “favorable to the UA” System.

Moore said last week that colleges could ask that the student borrower claims be resolved individually, rather than as a class. Phoenix is careful in that it “records every conversation with students” seeking to borrow money, he said. “Phoenix is very sophisticated about this kind of stuff.”

Moore also said Phoenix believes “that the vast majority of the claims against them would not hold up under review and, in fact, many claims that are being reviewed are being discarded. They look forward to offering a vigorous defense of their business practices and the review of each claim. To put a finer point on it, when you hear critics say that UoP or another university ‘could’ face a BDR claim in the $$$$ range, keep in mind that is a worst case scenario and assumes there is no opportunity for the university to defend themselves. Our review indicates that the BDR claims against UoP are vastly inflated.”

According to Hinkel, Bobbitt has also “said that he expects representation in some way from UA Trustees” on the TES Inc. board.