SHORT-TERM AND LONG-TERM DEBT

U.S. Department of Education Letters of Credit

The Company had outstanding letters of credit of $354.0 million at December 31, 2013, the largest of which is issued to the U.S. Department of Education, which requires the Company to maintain a letter of credit due to its failure to satisfy certain regulatory financial ratios after giving effect to the Transaction. The amount of this letter of credit was $348.6 million at December 31, 2013, which equals 15 percent of the total Title IV aid received by students who attended the Company’s institutions during the fiscal year ended June 30, 2012.

As of December 31, 2013, in order to fund its current letter of credit obligation to the U.S. Department of Education, the Company utilized all $200.0 million of capacity under two cash secured letter of credit facilities, in connection with which the Company classifies $210.0 million as restricted cash to satisfy the 105 percent collateralization requirement, and $148.6 million of letter of credit capacity under its $328.3 million revolving credit facility, which expires on June 1, 2015. The cash secured letter of credit facilities currently mature on July 8, 2014 or earlier if the existing revolving credit facility is terminated. Any future reduction in the usage of the cash secured letter of credit facilities will reduce the amount of cash that is classified as restricted cash on the consolidated balance sheet. In January 2014, the U.S. Department of Education decreased its letter of credit requirement from $348.6 million to $302.2 million, which equals 15 percent of total Title IV aid received by students who attended the Company's institutions during the fiscal year ended June 30, 2013.

Short-Term Debt

There were $75.0 million of borrowings outstanding at June 30, 2013 under the revolving credit facility, all of which was repaid in full on July 1, 2013. No borrowings were outstanding under the revolving credit facility at December 31, 2013 and 2012. After adjusting for outstanding letters of credit, which decrease availability thereunder, the Company had $174.3 million of additional capacity under the revolving credit facility at December 31, 2013 available for borrowings or issuance of letters of credit.

The interest rate on amounts outstanding at June 30, 2013 under the revolving credit facility was 6.25 percent, which is equal to the prime rate as defined under the credit facility plus a margin of 3.00 percent. The applicable margin for borrowings under the revolving credit facility can change depending on the Company's leverage ratios and credit ratings. Education Management LLC ("EM LLC"), an indirect wholly-owned subsidiary of the Company, is obligated to pay a per annum commitment fee on undrawn amounts under the revolving credit facility, which is currently 0.375 percent and varies based on certain leverage ratios. EM LLC must also pay customary letter of credit fees for outstanding letters of credit under the revolving credit facility, which is secured by certain of the Company’s assets and is subject to the Company’s satisfaction of certain covenants and financial ratios described further below.

Long-Term Debt

The Company’s long-term debt consisted of the following amounts (in thousands):



	December 31, 2013			June 30, 2013			December 31, 2012
Senior secured term loan facility, due in June 2016 ("Tranche C-2 Loan")	$	732,412		$	736,454		$	740,497
Senior secured term loan facility, due in March 2018, net of discount of $2,593, $2,898 and $3,203 ("Tranche C-3 Loan")	340,776			342,364			343,954
Senior cash pay/PIK notes due 2018, net of discount of $25,024 and $27,712 ("PIK Notes")	211,073			206,242			—
8.75% senior notes	—			—			375,000
Other	27			180			324
Total long-term debt	1,284,288			1,285,240			1,459,775
Less current portion	(11,901		)	(12,076		)	(12,076		)
Total long-term debt, less current portion	$	1,272,387		$	1,273,164		$	1,447,699

Cash interest on the PIK Notes accrues at the rate of 15.0 percent per annum and is payable semi-annually on March 30 and September 30. For any interest period after March 30, 2014 up to and including July 1, 2018, interest in addition to the cash interest payable will be paid by increasing the principal amount of the outstanding PIK Notes (“PIK Interest”). Additionally, the PIK Notes are required to be paid at a premium of 13.0 percent at their contractual maturity, which is being treated as an original issuance discount for accounting purposes. Including PIK Interest and the original issuance discount, the annual effective interest rate on the PIK Notes is 19.8 percent. The Tranche C-3 Loan bears interest at a rate equal to the greater of three-month LIBOR or 1.25 percent, plus a margin of 7.0 percent, which yielded an interest rate of 8.25 percent at December 31, 2013, June 30, 2013 and December 31, 2012. The Tranche C-2 Loan bears interest at a rate equal to three-month LIBOR plus a margin of 4.00 percent, which yielded an interest rate of 4.25 percent, 4.31 percent and 4.38 percent at December 31, 2013, June 30, 2013 and December 31, 2012, respectively.

The indenture and credit agreement governing the senior secured credit facilities and PIK Notes, respectively, contain a number of covenants that, among other things, restrict, subject to certain exceptions, EM LLC’s ability to incur additional indebtedness, pay dividends and distributions on or repurchase capital stock, create liens on assets, repay subordinated indebtedness, make investments, loans or advances, make capital expenditures, engage in certain transactions with affiliates, amend certain material agreements, change its lines of business, sell assets and engage in mergers or consolidations. In addition, EM LLC is required to satisfy and maintain a maximum total leverage ratio and a minimum interest coverage ratio under the senior secured credit facilities on a quarterly basis. EM LLC met the requirements of these two financial covenants for the twelve month period ended December 31, 2013. While the Company has continued to satisfy applicable financial covenant compliance ratios, the margin between the actual results and the covenant requirements has decreased significantly over the past 12 months due to declining operating performance.