Education Management bond plan cannot short dissidents -U.S. Judge

Education Management

23/06/2015 21:55

By Tom Hals 
    June 23 (Reuters) - Education Management Corp's  EDMC.PK  
recent $1.5 billion debt-cutting plan cannot reduce what the 
for-profit educator owes to dissident bondholders, according to 
a federal judge's ruling on Tuesday that turned on a 
Depression-era law. 
    The company, which operates 110 campuses under The Art 
Institutes and Argosy University names, violated the Trust 
Indenture Act of 1939 that protects bondholder rights, according 
to U.S. District Judge Katherine Failla in Manhattan. 
    The ruling is a victory for Marblegate Asset Management, an 
investment firm that held $14.3 million in unsecured notes 
issued by Education Management and refused to consent to the 
company's debt-cutting plan. 
    Failla's ruling is the second in the case. Late last year 
she declined to enjoin the debt-cutting plan, although she said 
at the time the plan likely violated the Trust Indenture Act. 
    The December opinion and one soon after involving Caesars 
Entertainment Corp  CZR.O  from U.S. Judge Shira Scheindlin, 
also in Manhattan, prompted legal experts to speculate it could 
become harder for companies to reduce their debts without 
bankruptcy. 
    Tuesday's ruling centers around a deal to cut the debt of 
Education Management Corp, which had to avoid filing for 
bankruptcy to maintain its access to federal student loan 
programs. 
    A committee of its creditors agreed to swap their loans and 
bonds for new debt and equity in the company. Lenders would get 
about 55 percent of the $1.3 billion they were owed and 
investors holding $217 million in notes would get a 33 percent 
recovery. 
    If any creditors refused to consent, the company's lenders 
agreed to foreclose on Education Management's assets, sell them 
to a subsidiary of the company, and then divide ownership of the 
subsidiary to achieve the terms of the original plan. 
    The foreclosure plan would deny any recovery to hold-out 
creditors, who would be left holding guarantees against a 
corporate parent without assets. 
    "The restructuring gave dissenting bondholders a Hobson's 
choice: take the common stock, or take nothing," wrote the 
judge. 
    In her 30-page opinion, Failla said the courts should not 
"allow minority bondholders to be forced to relinquish claims 
outside of the formal mechanisms of debt restructuring." 
    Education Management declined to comment, while Marblegate 
praised the ruling. 
    Shares of Education Management, which trades over the 
counter, ended down 10.7 percent at 12.5 cents, a year low. 
    The case is Marblegate Asset Management v Education 
Management Corp, U.S. District Court, Southern District of New 
York, No. 14-8584 
 
 (Editing by Andrew Hay) 
 ((thomas.hals@thomsonreuters.com; +1 610 544 2712; Reuters 
Messaging: thomas.hals.thomsonreuters.com@reuters.net)) 
 
Keywords: EDMC RULING/