Education Management agrees in principle to debt restructuring terms

By Caroline Salls

Pittsburgh, Aug. 27 – Education Management Corp. reached an agreement in principle with holders of more than 80% of its secured and unsecured financial debt regarding a financial restructuring that reduces funded debt by $1.1 billion, according to a news release.

“We believe this plan, which will convert a significant portion of our debt into equity and result in a vastly improved capital structure with lower interest expense and extended maturities, is in the best interests of all stakeholders, most importantly our students,” president and chief executive officer Edward H. West said in the release.

“This new capital structure is critical to the future success of EDMC and part of our plan to transform the company.”

Education Management said the proposed restructuring calls for the exchange of $1.5 billion of outstanding debt as of June 30 for $400 million of new debt, preferred equity interests that would be convertible into common shares and warrants for the purchase of common shares.

Existing shareholders would retain 4% of the outstanding common stock after giving effect to the conversion of the new preferred stock and receive warrants to purchase an additional 5% of the common stock.

Restructuring terms

According to an 8-K filed with the Securities and Exchange Commission, the specific terms of the restructuring and a related credit facility amendment include the following:

• All interest, but not letter-of-credit fees, owed to consenting lenders under the company’s existing credit agreement will be payable in kind starting with the Sept. 30 interest payment date, through and including June 30, 2015.

The maturity of the company’s revolving facility will be extended to July 2, 2015;

• Financial covenants will be waived through June 30, 2015;

• Consenting holders will exchange existing senior cash pay/PIK pay notes due 2018 for notes fully payable-in-kind through the March 2015 interest payment date;

• $150 million of revolving loans will be repaid, subject to reborrowing under a new credit facility maturing March 31, 2019 for the restructured company. The new credit agreement will bear interest at Libor plus 450 basis points;

• Letters of credit issued under the existing credit agreement will be rolled into the new credit agreement, and terms of cash collateralized letter-of-credit facilities will be extended until March 31, 2019;

• Each lender holding term loans and/or unpaid revolving loans will receive its share of $150 million of new first-lien senior secured tranche A term loans maturing July 2, 2020, $250 million of new first-lien senior secured tranche B term loans due July 2, 2020, $200 million of preferred A-1 stock with an initial liquidation preference of $200 million and roughly $557 million of preferred A-2 stock with an initial liquidation preference of $557 million.

Interest on the tranche A loans will be Libor plus 450 bps, and interest on the tranche B loans will be Libor plus 750 bps, with 100 bps payable in cash and the rest in kind;

• Holders of existing notes and PIK notes will receive their share of about $219 million of preferred B stock and warrants; and

• Existing shareholders will receive their share of retained interest in 4% of common stock after giving effect to conversion of preferred A-1, A-2 and B stock but subject to dilution on account of management incentive plan, noteholder warrants and existing equity warrants, as well as a share of warrants.

The noteholder warrants will be for 10% of common stock at a strike price based on $1.25 billion enterprise value, will expire in seven years and will be exercisable at the option of the holders only upon receipt of requisite regulatory change of control approvals. The existing equity warrants will be for 5% of common stock at a strike price based on enterprise value where holders of existing notes would receive a full recovery, will expire in seven years and will be exercisable at the option of holders.

Also under the restructuring, preferred holders may appoint two directors to the company’s board, and the board will create a committee to supervise the regulatory approval process consisting of two preferred directors and two current directors.

The comprehensive, multi-step restructuring remains subject to applicable regulatory approvals and a shareholder vote, which the company expects to complete in 2015. Education Management’s board of directors approved the restructuring.

According to the release, the restructuring plan has the support of more than 80% of revolving lenders, term loan lenders and bondholders. The company said it is seeking support from the remaining lenders and bondholders.

Education Management said in the 8-K that the restructuring will be implemented on an out-of-court basis over the objection of dissenting creditors if less than 100% of the secured lenders and bondholders consent to the transaction.

Education Management is a Pittsburgh-based provider of private post-secondary education.

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