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I AGREE
20 Jan 2011
Approximately $2.0 Billion of Long-Term Rated Debt Affected
New York, January 20, 2011 -- Moody's Investors Service revised Education Management LLC's ("Education
Management") ratings outlook to stable from positive. Moody's
also assigned B1 ratings to the company's amended/extended $328
million revolving credit facility due 2015 and $759 million senior
secured term loan due 2016. Moody's affirmed the B1 ratings
on the non-extended portions of the $114 million revolving
credit facility due 2012 and $353 million senior secured term loan
due 2013. Moody's also affirmed the B1 corporate family rating,
the B1 probability-of-default rating, the B2 rating
on the senior unsecured notes due 2014, and the B3 rating on the
senior subordinated notes due 2016. Moody's also affirmed
the SGL-1 speculative grade liquidity rating.
Ratings assigned:
$328 million senior secured revolving credit facility due 2015
at B1 (LGD3, 45%);
$759 million senior secured term loan due 2016 at B1 (LGD3,
45%).
Ratings affirmed:
Corporate Family Rating at B1;
Probability-of-Default Rating at B1;
$114 million senior secured revolving credit facility due 2012
at B1 (LGD3, 45%);
$353 million senior secured term loan due 2013 at B1 (LGD3,
45%);
$375 million senior unsecured notes due 2014 at B2 (LGD5,
75%);
$48 million senior subordinated notes due 2016 at B3 (LGD6,
96%).
RATINGS RATIONALE
The outlook revision reflects negative industry headwinds due to significant
uncertainty over the final form and long-term effects of the Department
of Education's ("DOE") pending gainful employment guidelines,
generally increased government regulation and industry oversight,
and potential challenges complying with ongoing regulatory metrics such
as the "90/10 Rule" due to the reduced availability of private
loans and pressure on students ability to pay tuition in cash.
The outlook revision also incorporates Moody's concern that any
potential actions to conform with gainful employment guidelines will likely
have negative implications for enrollment and profitability.
The DOE proposed guidelines in July 2010 that would impose minimum student
repayment and maximum debt-to-income requirements on educational
programs in order for their students to remain eligible for Title IV programs.
Under the "90/10 Rule", an institution will cease to
be eligible to participate in Title IV programs if, on a cash accounting
basis, more than 90% of its revenues for each of two consecutive
fiscal years were derived from Title IV programs.
Education Management's B1 corporate family rating is supported by
its business position as one of the largest providers of post-secondary
education in the U.S., significant scale with revenues
in excess of $2.5 billion, the diversity of its academic
programs, moderate leverage with debt to EBITDA below 3.5
times, good interest coverage metrics, positive free cash
flow generation despite material discretionary capital expenditures,
and demonstrated ability to increase enrollment levels through economic
cycles. Education Management has experienced limited downside risk
in a higher unemployment environment and even benefited from increased
enrollments as workers seek retraining. Notwithstanding these positives,
the rating also considers that Education Management will face significant
challenges related to proposed DOE gainful employment regulations,
high levels of discretionary capital spending that limits free cash flow
generation, increased bad debt expense, and continued pressure
on the private student loan market. In addition, Title IV
programs are generally dependent on government's willingness to
invest in education and are subject to political and budgetary concerns.
The stable outlook builds in tolerance for some deterioration in profitability
and credit metrics as Education Management takes actions to conform with
gainful employment guidelines.
Upward ratings momentum is currently limited due to significant uncertainty
over the long-term effects of gainful employment on Education Management's
revenue and earnings. However, the ratings could experience
positive pressure to the extent that over-time, the company
can demonstrate compliance with gainful employment rules and other regulatory
requirements, while sustaining its current earnings levels and credit
metrics, and a very good liquidity profile.
Barring an exogenous event, Moody's does not anticipate negative
ratings pressure. However, a sustained contraction in the
company's profitability, a change in the competitive landscape,
or deterioration in its liquidity profile could result in ratings pressure.
A change in financial policy, including debt-financed acquisitions
or increased shareholder enhancement activities could also pressure the
outlook and/or ratings.
The affirmation of the SGL-1 speculative grade liquidity reflects
Moody's view that liquidity will remain very good in the near-term,
supported by a large unrestricted cash balance, expectations for
positive free cash flow and meaningful cushion under financial covenants
though offset by limited available capacity under its revolving credit
facility.
For further detail, subscribers can refer to Moody's Credit Opinion
for Education Management LLC found on www.moodys.com.
The principal methodologies used in this rating were Global Business &
Consumer Service Industry published in October 2010, and Loss Given
Default for Speculative-Grade Non-Financial Companies in
the U.S., Canada and EMEA published in June 2009.
Education Management LLC, based in Pittsburgh, Pennsylvania,
is one of the largest providers of private post-secondary education
in North America, based on student enrollment and revenue.
The company had revenues of approximately $2.6 billion for
the twelve months ended September 30, 2010.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, public information, and confidential
and proprietary Moody's Investors Service information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
New York
Daniel Marx
Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Kendra M. Smith
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's Revises Education Management's Outlook to Stable from Positive
No Related Data.
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