The educational technology company 2U Inc kicked off its Chapter 11 case with a restructuring support agreement (RSA) and reorganization plan through which various secured lenders and unsecured noteholders will receive equity in a reorganized business, dropping 2U’s total debt by more than 50%.

2U filed a Chapter 11 petition early today (25 July) in the US Bankruptcy Court for the Southern District of New York, alongside a plan, disclosure statement and request to access USD 64m in debtor-in-possession (DIP) financing from certain unsecured noteholders. In total, as of 30 June, 2U reported USD 1.22bn in assets against USD 1.15bn in liabilities. Although 2U refers in bankruptcy court filings and press releases to its prearranged Chapter 11 plan as a “prepackaged” deal, it has not completed solicitation of creditor votes.

The company has an RSA backed by holders of 87% of its USD 1.03bn in prepetition funded loan and unsecured note debt, including funds managed by Mudrick Capital Management, LP, Greenvale Capital LLP, and Bayside Capital, LLC. Through its proposed prearranged plan, 2U aims to emerge from bankruptcy with USD 459m in total debt, with the RSA backers holding majority ownership of the reorganized business, according to bankruptcy court filings. The company hopes to spend a short time under Chapter 11 protection, aiming to pursue confirmation of its prepackaged plan by 6 September.

A first-day hearing has not yet been scheduled.

Debtwire Dockets: 2U Inc (access required)

The company

A provider of online educational technology that launched in 2008, 2U reaches tens of millions of people worldwide with access to graduate, undergraduate, and non-degree higher education offerings, according to a first day declaration from Matthew Norden, the company’s chief financial officer and chief legal officer. The company typically works in partnership with various non-profit colleges and universities, which use 2U’s platforms, including edX.org, to offer online courses and programs.

“2U currently provides over 86 million learners around the world with access to over 4,700 educational programs, ranging from free courses to full degrees, in partnership with more than 260 institutions and corporations,” Norden said. “Institutions of higher education choose to partner with 2U because of its dedicated focus on quality and student outcomes, as well as the unique bundle of support services, technology, and upfront investment capital it provides to launch programs.”

The company generally operates remotely; its bank accounts and some of its key institutional partners—including New York University, Columbia University, and Fordham University—are located in New York, according to bankruptcy court filings.

After its founding, 2U initially started with a master’s degree program in teaching, through a partnership with a public university in California, before expanding into other graduate program offerings between 2009 and 2013. In 2014, the company went through an initial public offering process and became publicly traded on the Nasdaq Global Select Market, said Norden.

More expansion followed over the subsequent years into new graduate level offerings, and eventually 2U began bolting on new offerings through acquisitions. In 2017 and 2019, in an effort to build out its ability to offer “boot camp” and micro-credentials for adult learners looking to “upskill and reskill,” 2U acquired an executive education provider and a boot camp provider. In 2021, 2U acquired edX, which had been founded as a non-profit entity by Harvard University and the Massachusetts Institute of Technology to offer free “massive open online courses” or “MOOCs,” the CFO said.

Currently, Norden said, the entirety of 2U’s offerings, from MOOCs to degree programs, are accessible on the edX online platform. The company relies on a network of employees and contract workers to offer its educational programs, with some 3,130 employees and 270 contractors. Of the employees, 1,820 are full-time, 1,310 are part-time. Some of 2U’s non-debtor affiliates operating outside the US have an additional 1,420 employees working for them in other countries.

Source: First day declaration of Matthew Norden dated 25 July 2024

The debt

The educational technology company reported USD 425m in secured revolver and term loan debt and another USD 601m in unsecured debt. The secured term loan debt stems from 2U’s 2021 acquisition of edX, which cost USD 800m and was funded in part by a first lien term loan.

On the unsecured side, USD 382m falls under 2.25% senior convertible notes with a May 2025 maturity and USD 150m falls under 4.5% senior convertible notes with a February 2030 maturity. The company lists the indenture trustee on those notes – Wilmington Trust NA – as holding to two single largest unsecured claims against 2U. The company also identified USD 65m in other general unsecured debt.

The descent

Norden said that around the time of the edX acquisition in 2021, 2U “had several reasons to be optimistic about its future,” including a shift toward more online education as the COVID-19 pandemic continued to grip the world. The acquisition, itself, also expanded 2U’s reach and offered the company an ability to provide a single integrated platform for its partner colleges and universities.

Those factors continue to give 2U hope, but Norden said the company’s capital structure has left it in an unsustainable position given its current business plan and limits on its liquidity position. As one specific source of financial pressure, the company doesn’t believe it will have enough liquidity to deal with a “maturity wall” coming up under its debt obligations.

Norden said that despite maturities in 2026 under its loan documents, 2U truly faces a maturity wall at the start of January 2025; at that point, the company’s USD 40m in first lien revolver debt is due to mature early, so long as more than USD 50m remains outstanding on 2U’s unsecured notes. That acceleration under the revolver, in turn, could trigger a series of cross defaults under the notes and term loan, effectively putting 2U on the hook for payment of the vast majority of its funded debt early next year.

The company’s financial position, along with dynamics in the capital markets, has made it difficult for 2U to find refinancing options for its debt and, at the same time, has led some of its partner colleges and universities to delay signing new contracts or offering new programs with 2U as a partner.

Norden also noted that, despite a boost in online learning during the pandemic, 2U has seen demand wane in the more recent past. The company’s professional certification and boot camp type offerings have also suffered from lower demand amid an uptick in artificial intelligence that has reduced the number of entry-level computer coding jobs.

“Making matters worse, beginning in 2023, the demand for entry-level technology jobs unexpectedly declined as technology companies began shedding employees following a boom in hiring during the pandemic,” said Norden. “The unforeseen adoption of artificial intelligence during the same period also began to impact demand for entry-level coding positions and, eventually, led to a decline in demand for 2U’s coding Boot Camp offerings.”

The DIP facility and Chapter 11 case

Given its financial stresses and difficulty finding an out-of-court sale or refinancing that would address its debt load adequately, 2U ultimately entered discussions with an ad hoc noteholder group and an ad hoc first lien group. Eventually the parties arrived at the RSA that now forms the basis of 2U’s proposed path into and out of Chapter 11.

Overall, the Chapter 11 plan would shed about USD 486.3m in debt from 2U’s balance sheet, leaving it with about USD 458.5m in remaining funded debt. The transactions embodied in the RSA and proposed Chapter 11 plan specifically convert 2U’s unsecured notes into 100% of the equity interests in the reorganized company that will emerge from Chapter 11.

First lien lenders, meanwhile, would receive USD 414m in take-back first lien loans that would amend and extend the maturities from 2U’s prepetition debt. The RSA and plan provide for 2U to pay down USD 70m of the new first lien loan in installments over a 21-month period; a USD 30m payment would come on the date that its Chapter 11 plan takes effect, another USD 20m payment would come 15 months after the effective date, and a final USD 20m payment would come 21 months after the effective date, according to Norden’s declaration.

The RSA also provides for a new money USD 64m DIP facility to fund 2U’s efforts to move through the bankruptcy process, and that financing would later become part of a second lien exit facility. The company also intends to offer unsecured noteholders the ability to participate in a USD 46.5m equity rights offering for common stock in the corporate parent of the reorganized 2U debtors. Certain noteholders have agreed to backstop the rights offering, the proceeds of which would go toward funding the USD 30m paydown of first lien debt expected on the plan’s effective date, according to Norden.

The advisors