| Long-Term Obligations |
1 4 . LONG-TERM OBLIGATIONS , LIQUIDITY AND CAPITAL RESOURCES
Long-term obligations, excluding capital lease obligations, consist of the following (dollars in thousands):
July 2,
December 31,
2017
2016
Revolving credit facility at approximately 9.75% base rate and 7.51% Euro rate,
due June 2018
$ 19,500
$ 31,920
Premium payment due, in connection with Fifth Amendment
1,125
—
Unamortized debt issuance costs
(1,095)
(521)
Secured variable rate industrial development bonds, 0.9% average interest rate at
July 2, 2017, due in 2027
6,000
6,000
Unamortized debt issuance costs
(51)
(54)
State of Ohio assistance loan at 6%, due May 2017
—
655
Unamortized debt issuance costs
—
(11)
State of Ohio loan at 3% , approximately $30 due monthly and final
payment due May 2019
626
788
First lien term loan at 7.79% , due June 2019
178,300
158,300
Premium payment due, in connection with Fifth Amendment
2,675
—
Unamortized debt issuance costs
(3,579)
(728)
Unamortized discount
(1,289)
(1,684)
Second lien senior secured notes at 9.0% , due June 2020
250,000
250,000
Unamortized discount
(1,953)
(2,238)
Unamortized debt issuance costs
(3,431)
(3,930)
446,828
438,497
Less obligations due within one year
(19,827)
(982)
$ 427,001
$ 437,515
During the first six months of 201 7 , the Company made mandatory debt repayments of $0.8 million on its State of Ohio loans. The Company also borrowed $290.8 million and repaid $303.2 million on its revolving credit facility, leaving an outstanding balance at quarter-end of $19. 5 million. Approximately $13.1 million of the revolving credit facility commitment was used in the form of outstanding letters of credit issued thereunder, which, in accordance with its debt covenants, le ft approximately $2.8 million o f unused borrowing capacity under its revolving credit facility. No amounts were drawn by beneficiaries under the outstanding letters of credit.
First Lien Credit Agreement
On June 28, 2013, Appvion entered into a credit agreement (the “Credit Agreement”) providing for a $100 million revolving line of credit due June 28, 2018 and a $335 million first lien term loan due June 28, 2019 . The Credit Agreement ranks senior in right of payment to all existing and future subordinated indebtedness of Appvion and is secured by security interests in substantially all of the property and assets of Appvion and the debt guarantors. As noted above, the maturity date of the revolving credit facility is June 28, 2018 and the maturity date of the first lien term loan is June 28, 2019. The Credit Agreement is unconditionally, and jointly and severally, guaranteed by PDC , Appvion Canada, Ltd . and APVN Holdings LLC. It contains covenants customary for similar credit facilities. Affirmative and negative covenants under the Credit Agreement restrict Appvion’s ability and the ability of Appvion’s subsidiaries, subject to certain exceptions, to incur additional indebtedness and liens, engage in sale and leaseback transactions, make investments, make loans and advances, transact certain asset sales, engage in mergers, acquisitions, consolidations, liquidations and dissolutions, pay dividends or make other payments in respect of equity interests and other restricted payments, engage in certain transactions with affiliates, limit capital expenditures and make prepayments, redemptions and repurchases of other indebtedness.
After giving effect to the Third Amendment and Fifth Amendment (as defined below), the total amount committed under the revolving line of credit was reduced to $75 million and $170 million of the first lien term loan was repaid using proceeds from the third quarter 2015 sale of the Company’s former Encapsys b usiness. The first lien term loan and revolving line of credit bear interest at a base rate plus 5.5% per annum or Eurodollar plus 6.5% per annum. The Credit Agreement provides for a fixed floor rate of 2.25% for base rate loans and 1.2 5 % for Eurodollar loans.
On July 30, 2013, Appvion fixed the underlying interest rate at 2.74% on $100.0 million of the first lien term loan using an interest rate swap contract with a forward start date of September 15, 2014 and a maturity date of June 28, 2019. Within five business days after the year-end financial statements have been filed, Appvion is required to prepay an aggregate principal amount of the term loan equal to the excess, if any, of (a) 50% of defined excess cash flow, provided that such percentage shall be reduced to (1) 25% based upon Appvion achieving a consolidated leverage ratio of less than 3.5 to 1.0 but greater than or equal to 2.5 to 1.0 and (2) 0% based upon Appvion achieving a consolidated leverage ratio of less than 2.5 to 1.0 minus (b) the aggregate amount of all prepayments of the revolving credit line which constitute permanent reductions of the revolving credit facility and all optional prepayments of the first lien term loan made during the year.
On August 3, 2015, Appvion, P DC, Jefferies Finance LLC, as administrative agent, Fifth Third Bank, as revolver agent, swing line lender and L/C issuer, and the lenders party to the Credit Agreement (the parties other than Appvion and PDC, the “Lending Parties”) entered into a Third Amendment (the “Third Amendment”) to the Credit Agreement. The Third Amendment became effective simultaneously with the closing of the s ale of the Encapsys b usiness. Upon its effectiveness, the Third Amendment, among other things, (i) permitted the Company to consummate the s ale of the Encapsys b usiness and provided for the corresponding re lease of liens on the Encapsys b usiness, (ii) required that not less than $165 million of the net proceeds be applied to prepay the revolving credit loans and the term loans under the Credit Agreement and provided that the remainder of the net proceeds be reinvested or otherwise applied to further prepay indebtedness in accordance with the Credit Agreement, (iii) provided for a permanent reduction of the revolving credit facility commitments from $100 million to $75 million , (iv) required the payment of a consent fee equal to 0.175% of the aggregate principal amount of loans and commitments, (v) added the pricing grid discussed above and (vi) further conformed certain terms and covenants under the Credit Agreement to acco unt for the sale of the Encapsys b usiness and the transactions contemplated thereby. The Third Amendment also removed the maximum consolidated leverage covenant and added (i) a maximum consolidated first lien leverage covenant that requires maintenance of a consolidated first lien leverage ratio, initially, of not more than 3.50 to 1.00, and on and after the third fiscal quarter of 2016, of not more than 3.25 to 1.00 and on and after the third fiscal quarter of 2017, of not more than 3.00 to 1.00 and (ii) a minimum consolidated fixed charge coverage covenant that requires maintenance of a consolidated fixed charge coverage ratio, initially, of not less than 0.95 to 1.00 and on and after the first fiscal quarter of 2016, of not less than 1.00 to 1.00. The Company incurred $0.9 million of debt acquisition costs related to the execution of this amendment. These costs have been deferred and will be amortized over the remaining term of the Credit Agreement.
On June 24, 2016, Appvion, PDC, and the Lending Parties entered into a Fourth Amendment (the “Fourth Amendment”) to the Credit Agreement dated June 28, 2013. The Fourth Amendment amended the definition of Consolidated EBITDA to provide for an additional add-back to Consolidated Net Income for cash, fees and/or expenses paid or incurred in connection with certain financial and advisory services provided to the Company and Appvion in an aggregate amount not to exceed $6.5 million.
On January 16, 2017, Appvion, PDC, and the Lending Parties entered into a Fifth Amendment (the “Fifth Amendment”) to the Credit Agreement dated June 28, 2013. The Fifth Amendment, among other things, (i) fixed the applicable interest rate on the Company’s term and revolving loans at 5.5% per annum for base rate loans and 6.5% per annum for Eurodollar loans, regardless of the Company’s then current consolidated leverage ratio, (ii) increased the maximum consolidated first lien leverage ratios applicable to the Company pursuant to the maximum consolidated leverage covenant to require maintenance of a consolidated first lien leverage ratio, during the first fiscal quarter of 2017, of not more than 3.60 to 1.00, during the second fiscal quarter of 2017, of not more than 3.50 to 1.00, during the period beginning on the third fiscal quarter of 2017 though the second fiscal quarter of 2018, of not more than 3.25 to 1.00 and from and after July 1, 2018, of not more than 3.00 to 1.00 and (iii) required the payment of a 1.5% premium on any prepayments, payments in connection with a change in control or a refinancing or payments at maturity of either term or revolving loans.
On February 16, 2017, Appvion, PDC, and the Lending Parties entered into a Sixth Amendment (the “Sixth Amendment”) to the Credit Agreement dated June 28, 2013. The Sixth Amendment amended the Credit Agreement to provide for the availability of additional term loans in an aggregate principal amount not to exceed $20.0 million, on the same terms and subject to the same conditions as the term loans already existing under the Credit Agreement. Proceeds from the issuance of these term loans were reduced by $0.8 million for original issue discount and the net proceeds were used to pay down the revolving line of credit.
Second Lien Secured Notes
On November 19, 2013, Appvion completed a voluntary refinancing of a portion of its debt to extend maturities and reduce interest expense. The refinancing included the issuance of $250 million in aggregate principal amount of second lien senior secured notes carrying an annual interest rate of 9.0% , payable semi-annually in arrears on June 1 and December 1 of each year. The notes will mature on June 1, 2020 and are unconditionally, and jointly and severally, guaranteed by PDC and Appvion Canada, Ltd. The notes are secured by a second-priority security interest in substantially all of the property and assets of Appvion and the debt guarantors. These liens are junior in priority to the liens on this same collateral securing the outstanding debt incurred under the Credit Agreement. The notes contain covenants customary for similar debt which restrict Appvion’s ability, as well as the ability of the guarantors, to sell or lease certain assets or merge or consolidate with or into other companies, incur additional debt or issue preferred shares, incur liens, pay dividends or make other distributions, make other restricted payments and investments, place restrictions on the ability of certain of Appvion’s subsidiaries to pay dividends or other payments to Appvion, enter into sale and leaseback transactions, amend particular agreements relating to Appvion’s transaction with its former parent Windward Prospects Ltd. and the ESOP and enter into transactions with certain affiliates.
Liquidity and Capital Resources
During the second quarter of 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern . This update provides U.S. GAAP guidance on management's responsibility in evaluating whether there is substantial doubt about a company's ability to continue as a going concern and about related footnote disclosures. The Company adopted this standard for the year ended December 31, 2016. Under this standard, the Company is required to evaluate whether there is substantial doubt about its ability to continue as a going concern for a period of 12 months following the date of issuance of the Company’s financial statements for the applicable reporting period, as of each reporting period, including interim periods.
The Company has significant debt maturities in the next 12 months, including $13.0 million outstanding under its accounts receivable securitization facility, which is set to mature on September 29, 2017 , and $19.5 million outstanding under its revolving credit facility, which will mature on June 28, 2018. These maturities, coupled with management’s forecast of future cash flows indicate that, if the Company is unable to refinance or extend its accounts receivable securitization facility due September 29, 2017 and/or the revolving credit facility due June 28, 2018, or otherwise to take steps to create additional liquidity, forecasted cash flows would not be sufficient for the Company to meet its obligations, including payment of the outstanding accounts receivable facility and the outstanding balance under the revolving credit facility at their maturities, as they become due in the ordinary course of business for the period of 12 months following August 16, 2017. As discussed below, the Company has plans to refinance these debts to extend their maturities and to create additional liquidity, however, there can be no assurance that these plans will be successfully completed.
Although the Company does not currently have the liquid funds necessary to repay the amounts outstanding under the revolving credit facility or the accounts receivable facility at their maturity, the Company is actively pursuing the capital markets to refinance all or a portion of its outstanding indebtedness, including the revolving credit facility and accounts receivable securitization facility. As a result of management’s efforts, the Company has received multiple non-binding financing proposals from third party sources to lend capital to refinance portions of the Company’s existing first lien debt, including its revolving credit facility and accounts receivable securitization facility (the “Refinancing”). Any commitment by the potential lenders is subject to, among other things, lender due diligence, the issuance of a written commitment letter and the negotiation and execution of definitive legal documentation satisfactory to the lenders and the Company. In addition to the Refinancing, the Company is considering its options with respect to the Company’s Second Lien Senior Secured Notes due June 2020. These actions are intended to mitigate those conditions which raise substantial doubt about the Company’s ability to continue as a going concern for the period of 12 months following August 16, 2017.
Additionally, the Company is continuing to pursue a strategy of profit improvement initiatives to enhance its financial flexibility and profitability. Management continues to review operational plans for the remainder of 2017 and beyond, which could result in changes to operational plans and projected capital expenditures. The Company closely monitors the amounts and timing of its sources and uses of funds, particularly as they affect the Company’s ability to maintain compliance with the financial covenants of its revolving credit facility.
The Company cannot predict the outcome of any actions to generate liquidity, including whether such actions will generate the expected liquidity as currently anticipated, or the ultimate availability of additional debt financing. The specific actions taken by the Company, the timing thereof, and the overall amount of any Refinancing will depend on a variety of factors, including market conditions.
Based on the significance of the Company’s debt obligations in the 12 months following August 16, 2017, including the maturities of $13.0 million under its accounts receivable facility that matures September 29, 2017 and the $19.5 million of outstanding borrowings under the revolving credit facility due June 28, 2018, and the uncertainty of the outcome of the Refinancing, management has determined that there is substantial doubt as to the Company’s ability to continue as a going concern for the period of 12 months following August 16, 2017. While management plans to complete the Refinancing and has retained advisors to assist it with this process, there can be no assurance that the Refinancing will be completed on terms acceptable to the Company or at all. The Company’s ability to meet its obligations as they become due in the ordinary course of business for the next 12 months will depend on its ability to successfully complete the Refinancing or other liquidity-generating transactions.
If the Company is unable to complete the Refinancing, or if there are other material adverse developments in the Company’s business results of operations or liquidity, the Company may be forced to reduce or delay our business activities and capital expenditures, sell material assets, seek additional capital or restructure its debt either as part of a negotiated arrangement with lenders or potentially through a bankruptcy process. There can be no assurance that the Company would be able to accomplish any of these alternatives on a timely basis or on satisfactory terms, if at all.
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