The groups that have lent money to Downtown-based Education Management Corp. may soon own most of the company.

An agreement, which still has to be approved by both regulators and shareholders, calls for the company’s lenders, led by the New York City-based investment firm KKR, to convert their loans to ownership stakes — essentially, buying the majority of the for-profit college chain.

The proposal, announced Wednesday by Education Management, calls for loans against the company to be reduced by $1.1 billion to $400 million. Those lenders instead would own more than 90 percent of the company.

The company’s stock price fell during the day to $1.47 a share, a loss of 7 cents a share or 4.55 percent.

EDMC has been hit by lawsuits under the False Claims Act and is the subject of investigations by the U.S. Justice Department and the Inspector General of the U.S. Education Department regarding federal loans and grants for students.

By taking an ownership stake, the lenders essentially will be taking over the education provider, which is now 75 percent owned by two investment firms, New York City-based Goldman Sachs Group at 43 percent and Rhode Island-based Providence Equity Partners with 32 percent.

The news release issued Wednesday by EDMC said current stockholders would wind up with a total of 4 percent of the company’s outstanding common stock and would be able to purchase an additional 5 percent.

The conversion of the debt to stock also would eliminate interest payments on that $1.1 billion in debt.

The company recorded interest expenses of about $120 million a year in its last quarterly statement.

Company spokesman Tyler Gronbach said removing the interest payments will allow the schools to keep tuition down.

“This is part of the overall transformation of the company,” he said. “This is a key element that allows us to strengthen our financial foundation as we continue to focus on making higher education more affordable for students.”

Mr. Gronbach said the deal will not be complete before 2015 because of the approvals needed.

“We believe this plan, which will convert a significant portion of our debt into equity and result in a vastly improved capital structure with lower interest expense and extended maturities, is in the best interests of all stakeholders, most importantly our students,” president and CEO Edward H. West said.

“This new capital structure is critical to the future success of EDMC and part of our plan to transform the company,” he said.

Education Management has struggled financially as enrollments have declined. This spring, EDMC posted a net loss of $468 million for its third quarter, which ended on March 31.

It is also facing a potential federal court trial next year in a multibillion dollar whistleblower case filed over its recruiting tactics under the False Claims Act. That case was joined by the Justice Department and five states.

Ann Belser: abelser@post-gazette.com or 412-263-1699

First Published: August 27, 2014, 1:53 p.m.
Updated: August 28, 2014, 1:24 a.m.