Education Management Corp., the for-profit college operator partly owned by Goldman Sachs Group Inc., clinched a deal with creditors that would effectively cede control to them in exchange for reducing debt. The stock tumbled as much as 23 percent.
The company reached an agreement with a majority of its lenders to cut borrowings by 73 percent to $400 million, according to a statement today. In return the lenders would get a preferred equity stake convertible to common shares and warrants for the purchase of additional stock, according to the statement. Existing shareholders would see their stake cut to 4 percent after the conversion of the preferreds, though they will be granted warrants to purchase an additional 5 percent of the common stock.
The deal waives all covenant requirements through June 2015, terminates principal amortization for the same period and reduces interest expense, according to the statement.
The Pittsburgh-based operator of institutions including Argosy University and Brown Mackie College hired Evercore Partners Inc. to negotiate with lenders as it was set to breach terms on its credit pact. The company is poised for a third straight year of revenue declines amid regulatory investigation into marketing and enrollment practices at for-profit colleges.
“This new capital structure is critical to the future success of EDMC and part of our plan to transform the company,” Chief Executive Officer Edward West said in the statement. The multi-step restructuring awaits regulatory and shareholder approval and is expected to be completed in 2015, the company said.
The business was purchased for about $3.4 billion by investors including Goldman Sachs and Providence Equity Partners LLC in June 2006, with about $1.3 billion in equity contributions, according to a regulatory filing the previous month. The two combined currently hold a majority equity stake, according to data compiled by Bloomberg.
Earlier the company had obtained a limited waiver from the creditors through Sept. 15 to carry out further negotiations.
Its stock, which was down 23 percent earlier in the day, traded at $1.30, a drop of 13 percent, at 12:47 p.m. in New York.
The preferred holders may appoint two directors, according to a regulatory filing today.