Business Context and Reporting Period
Company: Lincoln Educational Services Corporation
Filing Type: Form 8-K (Current Report)
Date of Report: December 31, 2015
Event: Entry into a Material Definitive Agreement (Amendment to Credit Agreement dated July 31, 2015).
Key Financial Metrics and Agreements
- Lease Termination Fee: $5 million paid on December 31, 2015, to terminate a lease for a culinary arts school in Hartford, Connecticut.
- Credit Agreement Amendment: Temporarily reduces the minimum Unrestricted Cash requirement from $27 million for the quarter ended December 31, 2015.
- Cash Reduction Cap: The reduction is limited to the lesser of $5 million or the verified out-of-pocket costs incurred for the lease termination.
- Prepayment Trigger: If the Company's composite score under 34 C.F.R. Part 668, Subpart L is less than 1.5, the Borrowers must prepay $5 million of term loan principal by February 26, 2016.
Material Changes and Operational Context
The Company terminated a long-term lease (originally running through July 31, 2031) for its Hartford, Connecticut facility. This was replaced with a short-term lease to allow currently enrolled students to complete their studies. The $5 million fee necessitated a temporary waiver of the $27 million unrestricted cash covenant for the specific quarter ending December 31, 2015.
Outlook, Risks, and Contingencies
- Regulatory Compliance Risk: The Company must deliver a certificate of its composite score by February 25, 2016.
- Liquidity Contingency: A composite score below 1.5 triggers a mandatory $5 million prepayment of term loans, including applicable premiums and accrued interest.
- Post-Determination Risk: If the score is initially reported as 1.5 or higher but later determined to be less than 1.5, the $5 million prepayment obligation must be fulfilled within three business days of such determination.
Investor Verification Checklist
- Verify the Company's composite score under 34 C.F.R. Part 668, Subpart L as of December 31, 2015, to assess the likelihood of the $5 million mandatory prepayment.
- Confirm the total verified out-of-pocket costs associated with the Hartford lease termination to ensure the cash covenant reduction is fully utilized.
- Review the short-term lease agreement terms for the Hartford facility to understand ongoing occupancy costs.
- Monitor the Company's cash position to ensure compliance with the $27 million unrestricted cash requirement for subsequent fiscal quarters.