Restructuring decision broadly interpreting bondholder protections under the Trust Indenture Act may significantly impact out-of-court restructurings.

On December 30, 2014, the US District Court for the Southern District of New York issued an opinion in Marblegate Asset Management v. Education Management Corp. interpreting broadly the protections granted to bondholders under the Trust Indenture Act of 1939 (the Act). Although ultimately denying the injunction sought by the plaintiff bondholders on other grounds, a substantial portion of the 47-page opinion analyzes Section 316(b) of the Act, taking the position that the Act was intended to prohibit companies from restructuring debt out-of-court as a means to eliminate certain material rights of non-consenting bondholders. Though set forth in dicta, this ruling has potentially significant implications for distressed companies and their creditors, particularly when chapter 11 is not an option. This Client Alert provides a brief discussion of the EDMC opinion and the potential impact on restructurings.

Background -

Education Management Corporation (EDMC), along with its subsidiaries Education Management LLC (EDM LLC) and Education Management Finance Corporation (together with EDM LLC, the Operating Subsidiaries, and collectively with EDMC and EDM LLC, the Company), is one of the country’s largest for-profit providers of college and graduate education. The Company has outstanding debt of US$1.522 billion, consisting of US$1.305 billion in secured term and revolving credit facilities (the Secured Debt, and the lenders issuing such Secured Debt, the Secured Lenders) and US$217 million in unsecured notes (the Notes, and the holders of such Notes, the Noteholders). The Secured Debt and the Notes were each guaranteed by EDMC, the parent of EDM LLC (the Parent Guarantee). The Notes are governed by an indenture (the Indenture) and are qualified under the Act. Section 6.07 of the Indenture expressly incorporates the protections provided for in Section 316(b) of the Act, stating that “the right of any Holder of a Note to receive payment of principal, premium...and interest on the Note...or to bring suit for the enforcement of any such payment...shall not be impaired or affected without the consent of such Holder” (emphasis added).