Business Context and Reporting Period
Company: Lincoln Educational Services Corporation
Filing Type: Form 8-K (Current Report)
Date of Report: March 31, 2017
Event: Entry into a new secured revolving credit agreement and termination of a prior term loan facility.
Key Financial Metrics and Debt Structure
New Credit Facility: $55 million aggregate principal amount with Sterling National Bank.
Term: 38 months, maturing May 31, 2020.
Structure:
- Facility 1 ($30 million): Composed of a $25 million revolving loan (Tranche A) and a $5 million non-revolving loan (Tranche B).
- Facility 2 ($25 million): Revolving loan facility with a $10 million sublimit for letters of credit.
Draws at Closing:
- Tranche A: $25 million drawn to repay the prior facility and pay transaction costs; approximately $1.832 million retained for working capital.
- Tranche B: $5 million drawn and deposited into an interest-bearing Pledged Account to secure potential environmental remediation costs.
Interest Rates:
- Tranche A: Greater of Prime + 2.50% or 6.00%.
- Tranche B and Facility 2: Greater of Prime or 3.50%.
- Letter of Credit Fee: 1.75% per annum.
- Unused Facility Fee: 0.50% per annum on average daily unused balance of Facility 1.
Collateral: First priority lien on substantially all personal property and mortgages on four real property parcels in Connecticut, Colorado, Tennessee, and Texas.
Material Changes Versus Prior Period
Termination of Prior Facility: The new agreement replaced a term loan facility led by HPF Service, LLC, which was repaid and terminated concurrently.
Termination Costs: The Company incurred an early termination premium of approximately $1.763 million.
Letters of Credit: Existing letters of credit totaling $6,186,906 from a maturing facility were transitioned to Facility 2.
Transaction Costs: An origination fee of $250,000 was paid to the Bank, along with other customary fees.
Guidance, Covenants, and Risks
Financial Covenants: The agreement includes restrictive covenants requiring:
- Restrictions on capital expenditures.
- Prohibition of net loss commencing December 31, 2018.
- Maintenance of minimum adjusted EBITDA and tangible net worth.
- Maintenance of a minimum quarterly average aggregate balance on deposit with the Bank (failure results in a $12,500 quarterly fee).
Breakage Fee: If the facility is terminated or refinanced within 18 months of closing, a $500,000 breakage fee is required.
Environmental Contingency: The $5 million Tranche B funds are held in a Pledged Account for potential environmental remediation. If no remediation is needed, funds will be applied to the principal balance, permanently reducing Facility 1 to $25 million.
Collateral Requirement for Facility 2: All draws for letters of credit or revolving loans under Facility 2 must be secured by 100% cash collateral.
Investor Verification Checklist
- Verify the Company's ability to meet the "no net loss" covenant starting December 31, 2018.
- Confirm the status of environmental studies on the mortgaged properties to determine if the $5 million Tranche B will be released or applied to principal.
- Monitor the Company's cash balances to ensure compliance with the minimum deposit covenant to avoid the $12,500 quarterly penalty.
- Assess the impact of the $1.763 million termination premium and $250,000 origination fee on current period earnings.
- Review the full text of the Credit Agreement (Exhibit 10.1) for detailed definitions of adjusted EBITDA and tangible net worth.