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EDMC reaches debt-restructuring deal with creditors

| Wednesday, Aug. 27, 2014, 10:36 a.m.

Education Management Corp. has agreed to turn over an “overwhelming majority” of its ownership to creditors in a deal that would give the struggling operator of for-profit colleges a financial reprieve and wipe out most of its debt.

The deal removes a cloud of uncertainty for the company as it battles declining enrollment and a potentially costly lawsuit by the federal government over its recruitment practices. The proposal would allow EDMC to avoid breaching its loan requirements and maintain access to critical borrowed funds.

“The deal would leave the company on a much more sound financial footing as it seeks to rightsize its business around a smaller revenue base,” said Trace A. Urdan, analyst at Wells Fargo Securities in San Francisco.

The proposed restructuring would reduce the Downtown-based company's debt to $400 million — a decrease of about $1.1 billion — and lower its interest payments. It would give the creditors an equity stake in the company, allowing them to appoint two directors to the company's board.

“This new capital structure is critical to the future success of EDMC and part of our plan to transform the company,” CEO Edward H. West said in a statement on Wednesday. He emphasized that the deal “is in the best interests of all stakeholders, most importantly our students.”

EDMC has 120,000 students on campuses in 32 states and employs 23,000 people, including 2,000 in Pittsburgh. Its schools include The Art Institutes, Argosy University and Brown Mackie College.

Urdan said regulators likely will scrutinize the deal but will give it their approval, given the obvious benefits to students in averting a financial crisis. Concerns about EDMC's health and future would add to problems in the for-profit college industry that have contributed to the company's decline.

EDMC's earnings and stock have suffered as some parents delayed sending their children to college or enrolled them in less-costly community colleges because of worries about the economy. It has not helped that for-profit colleges have been criticized — and received federal scrutiny — over claims that they have saddled students with huge debts without properly training them to be hired for jobs to pay off those loans.

The debt restructuring wouldn't resolve the issues confronting EDMC because of fundamental problems in the for-profit college industry or its business strategy. But it would give the company the ability to focus on addressing those problems without worrying that it will default on its loans and be squeezed by lenders.

The plan has been approved by the company's board and by more than 80 percent of debt holders, led by investment firm KKR & Co. LP. EDMC said it is seeking support from the remaining lenders and bondholders. The company expects the deal to be completed in 2015 pending shareholder and regulatory approval.

The creditors would be given preferred shares in the company that can eventually be exchanged for common stock. The company said existing shareholders are expected to retain 4 percent of the company's common stock based on the amount of preferred shares to be converted. Shareholders also would receive rights to purchase 5 percent in additional shares.

Investment company would acquire controlling interest

The stakes of owners Goldman Sachs and Providence Equity — 43.2 percent and 32.4 percent, respectively — would be substantially reduced said EDMC spokesman Tyler Gronbach. The pair acquired their interest in EDMC for $3.4 billion in 2006.

Gronbach said creditors would gain an overwhelming majority ownership in EDMC, but no management changes were included in the deal.

Spokesmen for Goldman Sachs and Providence Equity could not be reached. KKR spokeswoman Kristi Huller declined to comment.

EDMC shares fell 5.2 percent, down 8 cents to $1.46. The stock has declined 86 percent this year.

“Given the level of financial and potential regulatory risk facing the company as a result of its stressed capital structure, we view this proposed workout as a positive development for the shares despite the dramatic dilution,” said Urdan, of Wells Fargo.

According to the New York Post, KKR holds an amount of the company's debt sufficient that it likely will assume effective control as a result of the transaction. Urdan said combined controlling interests by Goldman Sachs and Providence Equity likely mean shareholder approval will not be an obstacle.

“(Goldman and Providence) made the calculation that they'd be better off letting the business and the industry recover and improve the value of their equity over time rather than accept depressed values today,” Urdan said.

Moves to cut costs, bolster enrollment preceded deal

The for-profit education company has been negotiating for months to restructure debt on which it broke loan covenants. Lenders had pushed for Goldman Sachs and Providence to give up most of their equity stake in exchange.

EDMC is headed for its third consecutive year of declining revenue and has other challenges. Since last year, it has slashed more than 600 employees nationwide, nearly half of them in Pittsburgh, and recently targeted employee retirement plans among its cost cuts.

Enrollment fell 23.6 percent from a high of 158,300 as of June 2012 to 120,920 at the end of March 2014, company figures show. Enrollment continued to decline this year, and West has said it is not likely to rebound for the remainder of the calendar year.

EDMC has focused on lowering the cost for its students to help boost enrollment and retention rates amid changes in federal financial aid programs. Last year, EDMC said it was freezing tuition for students at The Art Institute of Pittsburgh through at least 2015.

It is not the only for-profit education company having problems. University of Phoenix and Corinthian Colleges have been subject to similar allegations over improper recruiting. Corinthian said last month that it is selling 85 of its 107 campuses and online programs amid scrutiny from the Department of Education.

John D. Oravecz is a staff writer for Trib Total Media. He can be reached at 412-320-7882 or joravecz@tribweb.com.

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