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Education Management Cuts Deal to Trim Over $1B in Debt

NEW YORK ( The Deal) -- Embattled for-profit education company Education Management EDMC said Wednesday that it has reached an agreement in principle with holders of more than 80% of its debt for an out-of-court restructuring deal that would reduce its $1.5 billion debt load to $400 million through a debt-for-equity swap.

According to a financial industry source who follows the company, term lenders led by private equity firm KKR & Co. are in the driver's seat in the negotiations. The lenders want equity holders Goldman Sachs Capital Partners and Providence Equity Partners to stay in the deal in order to avoid change-of-control issues that would be troublesome from a regulatory perspective.

A consortium of private equity firms led by led by Providence Equity, Goldman Sachs Capital Partners, and Leeds Equity Partners owns 85% of the Pittsburgh-based company's equity after a March 5, 2006 leveraged buyout.

Another important point for Education Management's lenders is to take preferred equity instead of common equity, the source said, adding that the term lenders will take a larger share of equity than the revolving credit facility lenders. The financial industry source noted that the prevalence of asset managers, rather than bank lenders, in Education Management's capital structure made it a lot easier to pursue a debt-for-equity swap deal.

The for-profit education industry has long relied on traditional bank lenders for financing, but asset managers and distressed funds have increasingly been taking positions in these companies' debt, the source explained.

For-profit education can be a challenging industry for traditional bank lenders. They are likely to be unwilling to take equity stakes in these companies since they are especially averse to the possibility of litigation with U.S. regulators such as the Department of Education. Furthermore, when for-profit education companies face distress in an uncertain regulatory environment, bank lenders shy away from swapping debt for equity, since being equity owners could leave them vulnerable to demands from regulators that they should lay out more capital than they had previously intended, the source said.

Now that asset managers and distressed funds have built up a presence in the industry, more troubled for-profit education companies could pursue debt-for-equity swaps, the person suggested.

Education Management, which owns colleges including Art Institutes, Argosy University and Brown Mackie Colleges, said Wednesday that its restructuring plan would allow its operations to continue uninterrupted. With 110 business locations in 32 U.S. states and Canada, Education Management is the second-largest for-profit education company in the country after Apollo Education Group (APOL)  which runs University of Phoenix.

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