Test-preparation company, Education Holdings 1, Inc., was one of the earliest bankruptcy filers this year. The petition, delivered to the U.S. Bankruptcy Court in Manhattan, said the company has $100 to $500 million in assets and around the same amount of debts, although the bankruptcy petition is a mere checklist and these amounts may be lower or higher. The actual value of a debtor and its assets and liabilities are disclosed in the so-called schedules of assets and liabilities and statements of financial affairs, which are typically filed 15 days after a bankruptcy filing. Education Holdings though have sought permission from the bankruptcy court overseeing its Chapter 11 case to do without the filing of the schedules and statements because it already has a plan for reorganization, negotiated prior to its bankruptcy filing.


The plan, termed a “prepackaged plan,” will be voted on by senior secured claim holders, who are owed at least $36.3 million, second-lien facility claimants due $7 million and other note holders owed more than $110 million. The votes of these claimholders are necessary for Education Holdings to obtain the approval of the bankruptcy court as the prepackaged plan impairs the claims of the three groups of creditors. Impairment means these creditors will not receive 100% of what they are owed under the plan. The prepackaged plan, however, has already received a 100% affirmative vote from groups of senior secured claim holders, second-lien facility claims holders and senior and junior note claims holders, which means court approval may come easier for Education Holdings. Most prepackaged bankruptcy filings have high rates of success in reorganization and they often emerge from bankruptcy in a shorter span of time compared to those companies without prior reorganization plans.

Education Holdings’ bankruptcy filing came one month after it agreed to a $10 million settlement with the U.S. Justice Department on a lawsuit alleging that the test-preparation company, formerly known as Princeton Review, received tens of millions of dollars in federal funding for tutoring services to New York City school children that it didn’t provide. The company said Bain Capital Venture Fund LP of Boston is its biggest equity security holder, with 9.7 percent, while Falcon Investment Advisors LLC and Sankaty Advisors LLC are its biggest unsecured creditors, with each owed $56.3 million. The Justice Department could also be a creditor, although the company’s liabilities to it are yet “undetermined.”

Past cases have shown that a prepackaged bankruptcy filing allows for an easy and less-complicated Chapter 11 case, such as in the case of CIT Group Inc. (NYSE:CIT), which had billion dollars of assets and debts and thousands of creditors, and yet it emerged from bankruptcy just months after it filed because of a reorganization plan it already negotiated with creditors prior to bankruptcy filing. Such could be the case for Education Holdings, making it possibly a good buy for distressed-debt investors and claims traders. Education Holdings also has solid debtor-in-possession financing in the form of $5.6 million that could be increased to $7 million upon court approval.