© Reuters. Cantor Fitzgerald Downgrades 2U (TWOU) to Neutral as tech Company Faces Debt Maturity
Cantor Fitzgerald downgraded 2U, Inc. (NASDAQ to Neutral (Overweight) and cut his 12-month price target for the educational technology group to $1.50 (from $5.30) as the company struggles to “stay afloat”.
Heading into third-quarter results, TWOU stock was approaching its all-time lows. A recent 44% drop, from the second quarter through Nov. 8, was due to management’s failure to disclose in the prior quarter that full-year revenue guidance included a substantial one-time payment from university partners completing programs specific grades.
This revelation, along with 2U’s inability to generate positive FCF, has raised concerns among investors regarding the company’s upcoming debt maturities and its ability to repay or refinance those obligations.
2U faces $380 million of 2.25% convertible notes maturing in 2025, followed by a $380 million LIBOR + 5.5% term loan due 2026 and $147 million of convertible notes at 4.5% due 2030. At the end of 3Q23, 2U cash decreased to $41 million from $53 million in 2Q23.
“TWO will need to rectify their debt problem.” Cantor Fitzgerald analysts wrote in a note. “We believe it can issue shares (which would result in a 173% increase in the number of shares based on current prices) or refinance that debt with new debt.”
Going for the second option would likely lead to a significant increase in interest payments. The 2025 convertible currently has an interest rate of 2.25%, but its current yield to maturity (YTM) is 35%. If 2U were to refinance this debt at, say, a 12% interest rate, the cash interest payments would increase.
Currently, 2U receives up-front revenue from universities that are essentially buying back their degree programs from 2U. Because 2U owns these programs and anticipates that they will generate revenue in the future, universities are obligated to make payments.
This will lead to an increase in 2U’s accounts receivable balance, which will eventually decrease as the contract end date approaches, thereby strengthening 2U’s cash position on the balance sheet.
According to 2U, the termination of contracts in 2023 is expected to generate approximately $140 million in cash over the next 12 to 24 months.
In light of these contract terminations, management anticipates revenue growth of approximately $110 million and adjusted EBITDA growth of approximately $60 million in 2023.
TWOU shares fell 51.81% in afternoon trading on Friday.
