Hedge funds sue to block EDMC deal

Career College Central Summary:

  • Two hedge funds are suing to block a deal that would wipe out most of Education Management Corp.'s debt and make creditors the majority owners of the beleaguered operator of for-profit colleges.
  • The lawsuit was filed Tuesday in federal court in New York by Magnolia Road Capital and Marblegate Asset Management. It adds to the financial and legal problems that have plagued the Downtown-based company.
  • The firms say they own $20 million in EDMC debt. Their lawsuit claims EDMC's agreement with a majority of its creditors to convert $1.1 billion in debt into a majority equity stake in the company violates federal law and will impair their ability to recover their money.
  • EDMC has said creditors holding 94 percent of its total debt have agreed to the plan, which would cut what the company owes from $1.5 billion to $400 million.
  • New York-based Magnolia Road and Marblegate, a Connecticut hedge fund, said that they were not part of the negotiations between EDMC and its largest creditors. Those creditors, led by investment firm KKR & Co., reached a debt-restructuring deal with the company in August.
  • The lawsuit by Magnolia Road and Marblegate said the federal Trust Indenture Act prevents EDMC from impairing without their consent the hedge funds' ability to receive repayment on bonds they purchased from the company.
  • “The company has been very forthcoming about the disastrous impact the proposed restructuring and the intercompany sale are intended to have on any holders, including plaintiffs, who do not tender their notes,” the lawsuit said.
  • EDMC spokesman Chris Hardman said the company believes “the lawsuit is without merit, and we will defend ourselves.” He declined to comment further.

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