Education Media & Publishing Group, the educational publisher formed by Barry O’Callaghan’s leveraged buy-outs of Boston-based Houghton Mifflin and Harcourt, has agreed a refinancing which will lower its debt load and interest bills but heavily dilute equity holders.
The agreement will cut EMPG’s long-term debt, now standing at about $7.6bn, by more than $1bn and reduce annual interest costs by $100m, in exchange for a 45 per cent dilution of current shareholders.
Mr O’Callaghan, who reversed his Riverdeep educational software company into the publisher of school textbooks and the Curious George children’s titles, told the Financial Times he would see his 40 per cent stake cut to “the low 20s” and give up his voting control.
“The old equity realises it’s well under water,” he said.
“The difficult parts of the equity aren’t being led by some difficult private equity firm or deluded entrepreneur.”
The refinancing had averted any risk of a Chapter 11 filing and should carry EMPG through a year in which strained state budgets have prompted falls of up to 30 per cent in school budget spending.
Lawyers have been working on the agreement since a May 27 deadline by which EMPG – which competes with Pearson, the educational publisher and owner of the Financial Times – had been due to make cash interest payments to second lien lenders.
The terms include an effective 25 per cent relaxation of financial covenants on the debt, which falls into three tranches: $4.4bn of first lien loans, about $2bn of second lien loans secured on the operating company, Houghton Mifflin Harcourt, and $1.2bn of debt at the holding company level.
The sums outstanding on each have increased since March, when EMPG struck agreement with senior lenders including Apollo, Black Rock and Guggenheim Partners.
That agreement hinged on second lien lenders agreeing to convert their holdings into an instrument on which no cash interest would be paid.
In the new agreement, these lenders will forgo interest due since May, saving the company about $100m, and replace a cash interest rate of Libor plus 400 basis points with a payment in kind or PIK rate of 17.5 per cent.
Holding company debt will convert into common equity.
Mr O’Callaghan said EMPG had secured more than 90 per cent support from lenders, and now had ample liquidity, helped by a further $50m increase its working capital facility.
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