Business Context and Reporting Period
Company: Lincoln Educational Services Corporation
Filing Type: Form 8-K (Current Report)
Date of Report: July 31, 2015
Reporting Period: The filing reports on events occurring on July 31, 2015, and August 3, 2015, including the entry into a new credit agreement and the resignation of a director.
Key Financial Metrics and Debt Structure
New Credit Facility: The Company entered into a $45 million credit agreement consisting of:
- Term Loan A: $30 million from HPF Holdco, LLC and Rushing Creek 4, LLC, secured by a first priority lien on substantially all real and personal property.
- Term Loan B: $15 million from Alostar Bank of Commerce, secured by a $15.3 million cash collateral account.
Interest Rate: The greater of 11% per annum or 90-day LIBOR plus 9%, payable monthly in arrears.
Maturity Date: July 31, 2019.
Repayment Terms: Principal repayment begins August 1, 2017, in equal monthly installments calculated as 10% of the outstanding principal balance (as of July 2, 2017) divided by 12. A final balloon payment is due at maturity.
Prepayment Penalties: 5% premium for prepayments within the first two years; 3% premium for prepayments between the second and third anniversaries. No premium applies to the first $15 million of aggregate repayments made during the first year.
Transaction Fees: A $1.0 million commitment fee was paid to the administrative agent.
Material Changes Versus Prior Period
Termination of Prior Facility: The new agreement replaced a $20 million revolving credit facility with Bank of America, N.A., which was due to expire on April 5, 2016. The prior facility was terminated on July 31, 2015, with no early termination premiums incurred.
Use of Proceeds:
- Repayment of approximately $6.3 million in outstanding principal, accrued interest, and fees under the prior facility.
- Funding of the $15.3 million cash collateral account for Term Loan B.
- Funding of approximately $7.4 million in a cash collateral account to secure $7.1 million in letters of credit issued under the prior facility that remain outstanding.
- Payment of transaction expenses.
- Approximately $13.8 million remaining for capital expenditures and general corporate purposes.
Guidance, Risks, and Covenants
Covenants: The Credit Agreement includes customary financial covenants, including minimum liquidity, minimum capital expenditures, minimum fixed charge coverage ratio, minimum EBITDA, minimum financial responsibility composite score, and cohort default rate requirements.
Collateral Requirements: Net proceeds from the sale or disposition of a school or real property must be used to prepay the Loan (subject to premiums) or deposited as cash collateral until release conditions are met.
Risks: The filing notes that the Term Loan B is secured by a cash collateral account, limiting immediate liquidity for that portion of the debt. The high interest rate floor (11%) represents a significant fixed cost.
Investor Verification Checklist
- Verify the Company's ability to meet the minimum EBITDA and fixed charge coverage ratio covenants given the new debt service obligations.
- Confirm the status of the $7.1 million in letters of credit and the associated $7.4 million cash collateral requirement.
- Review the full text of the Credit Agreement (Exhibit 10.1) for specific definitions of "financial responsibility composite score" and "cohort default rate" thresholds.
- Assess the impact of the 11% interest rate floor on future profitability and cash flow projections.
- Monitor the Company's capital expenditure plans to ensure they align with the $13.8 million in available proceeds and covenant restrictions.