Notes Payable and Long-Term Obligations | 9 Months Ended |
Apr. 30, 2014 |
Notes Payable and Long-Term Obligations | ' |
(10) Notes Payable and Long-Term Obligations |
Long-term debt outstanding: |
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| | | | | July 31, | | | | | | | | |
| | April 30, | | | 2013 | | | April 30, | | | | | |
| | 2014 | | | As revised | | | 2013 | | | | | |
Secured Credit Facility | | $ | — | | | $ | 369,454 | | | $ | 370,364 | | | | | |
Oaktree Senior Notes | | | — | | | | 210,926 | | | | 203,548 | | | | | |
Guaranteed Loan | | | 8,900 | | | | 10,557 | | | | 11,096 | | | | | |
Notes | | | 230,000 | | | | — | | | | — | | | | | |
Term Loan Facility, net | | | 403,513 | | | | — | | | | — | | | | | |
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Total outstanding debt | | | 642,413 | | | | 590,937 | | | | 585,008 | | | | | |
Less: current portion | | | (4,062 | ) | | | (5,860 | ) | | | (5,806 | ) | | | | |
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Total long-term debt | | $ | 638,351 | | | $ | 585,077 | | | $ | 579,202 | | | | | |
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The Company determined that the Guaranteed Loan line item was understated by $2.2 million and the Secured Credit Facility line item was overstated by the same amount in the above disclosure as of July 31, 2013. Total long-term debt, total outstanding debt and the total current portion of debt were presented correctly. The Company assessed the materiality of this correction, concluded that this error was not material to the fiscal 2013 Consolidated Financial Statements and revised the July 31, 2013 balances to correct the presentation. |
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As of April 30, 2014, the current portion of long-term debt is presented net of an unamortized discount of $0.5 million related to the Term Loan Facility’s stated original issue discount of $2.0 million. The non-current portion of long-term debt is presented net of an unamortized discount of $1.5 million. |
Additionally, in accordance with ASC 470-50-40-2 – Debt – Modifications and Extinguishments, as a result of certain lenders that participated in the Company’s refinanced debt structure both prior to and after the restructuring, it was determined that a portion of the debt refinancing was considered to be a debt modification. Accordingly, the Company recorded approximately $3.6 million, of the Oaktree call premium that is associated with the modified debt as a contra-debt liability. As of April 30, 2014, the current portion of long-term debt is presented net of these unamortized creditor fees of $0.8 million and the non-current portion of long-term debt is presented net of these unamortized creditor fees of $2.7 million. |
In accordance with the guidance, approximately $5.2 million related the Company’s previous original issue discount on the Oaktree Notes was also determined to be associated with the modified debt as a contra-debt liability. As of April 30, 2014, the current portion of long-term debt is presented net of this unamortized discount of $1.1 million and the non-current portion of long-term debt is presented net of $3.9 million. |
These balances are presented on the Company’s Condensed Consolidated Balance Sheets as a contra-debt liability and will be amortized within Interest expense, net on the Company’s Condensed Consolidated Statement of Operations over the term of the Term Loan Facility. |
Net interest expense for the three and nine months ended April 30 is as follows: |
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| | Three Months | | | Nine Months | |
| | Ended April 30, | | | Ended April 30, | |
| | 2014 | | | 2013 | | | 2014 | | | 2013 | |
Secured Credit Facility | | $ | 1,061 | | | $ | 6,292 | | | $ | 12,577 | | | $ | 19,993 | |
Oaktree Senior Notes | | | 1,060 | | | | 6,448 | | | | 16,428 | | | | 17,690 | |
Guaranteed Loan | | | 115 | | | | 142 | | | | 365 | | | | 586 | |
ABL Facility | | | 159 | | | | — | | | | 159 | | | | — | |
Notes | | | 3,131 | | | | — | | | | 3,131 | | | | — | |
Term Loan Facility | | | 3,478 | | | | — | | | | 3,478 | | | | — | |
Interest income | | | — | | | | — | | | | (3 | ) | | | (5 | ) |
Capitalized interest | | | (44 | ) | | | (32 | ) | | | (84 | ) | | | (414 | ) |
Other | | | 182 | | | | 338 | | | | 490 | | | | 1,180 | |
Amortization of deferred financing costs and debt discounts | | | 1,440 | | | | 1,354 | | | | 4,993 | | | | 3,655 | |
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Interest expense, net | | $ | 10,582 | | | $ | 14,542 | | | $ | 41,534 | | | $ | 42,685 | |
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Description of Refinancing |
On February 19, 2014, the Company refinanced its debt capital structure. The Company entered into a 4.5 year senior secured term loan facility (the “Term Loan Facility”) in an aggregate principal amount of $415 million, a 4.5 year senior secured asset-based revolving credit facility (the “ABL Facility”) in an aggregate principal amount of $125 million and issued $230 million in 7.000% Senior Notes due March 2019 (the “Notes”). Pursuant to the Warrant Exercise Agreement, OCM PF/FF Adamantine Holdings, Ltd. (a subsidiary of Oaktree) exercised its warrant to purchase 4,420,859 shares of Diamond’s common stock at the $10 exercise price per share for $44.2 million, less a warrant cash exercise and contractual modification inducement fee of $15 million. The Warrant Exercise Transaction closed on February 19, 2014, concurrent with the refinancing transactions and the Company derecognized the warrant liability of approximately $84.1 million on that date. |
Diamond used the net proceeds of the Term Loan Facility, the Notes and the Warrant Exercise Transaction to (1) prepay approximately $348 million of indebtedness outstanding under, and terminate, the Secured Credit Facility, (2) prepay approximately $276 million of indebtedness outstanding under, and terminate, the Oaktree Senior Notes, (3) pay approximately $32.3 million of prepayment premiums to the holders of the Oaktree Senior Notes, and (4) pay fees related to the preparation, negotiation, execution and delivery of the definitive documentation for the Term Loan Facility, the Notes and the ABL Facility. In accordance with ASC 835-30-45-3 Imputation of Interest - Other Presentation Matters, the Company incurred $16.4 million of new debt issuance costs associated with the February 2014 debt refinancing. $2.1 million of these debt issuance costs were expensed to Loss on debt extinguishment based on the portion of the refinancing that was considered a debt modification for those lenders that had continued participation in the Company’s refinanced debt structure. The remaining $14.3 million debt issuance costs were recorded as deferred financing charges and will be amortized over the life of the respective new debt agreements into Interest expense, net. Debt issuance costs largely included arrangement fees paid to underwriters, legal fees, accounting fees, consulting fees, and printing fees. The Company recorded the current portion of these costs in Prepaid expenses and other current assets and the non-current portion was recorded in Other long-term assets in the Company’s Condensed Consolidated Balance Sheets. |
In accordance with ASC 470-50-40-2 – Debt – Modifications and Extinguishments, the Company recorded a Loss on debt extinguishment in the Condensed Consolidated Statement of Operations for the three and nine months ended April 30, 2014. Loss on debt extinguishment for the three and nine months ended April 30, 2014 was $83.0 million. Of the $83.0 million, the Company recorded approximately $70.3 million associated with the Oaktree Senior Notes which included $28.7 million related to the prepayment premium associated with the extinguished debt that the Company paid to the holders of the Oaktree Senior Notes and approximately $41.6 million related to the difference between the net carrying value and the repayment price of the Oaktree Senior Notes. The Oaktree Senior Notes were originally recorded at $43.2 million lower than the contractual repayment amount due to the allocation of proceeds to the Oaktree warrant of $36.5 million and original issue discount of $6.7 million subsequently, additional discount of $6.8 million was created related to the paid-in-kind interest that was added to the debt. The Company also paid a total call premium of $32.3 million of which $3.6 million related to the portion of the refinancing that was considered a debt modification and recorded as a contra-debt liability on the Company’s Condensed Consolidated Balance Sheets, the remaining call premium of $28.7 million was recorded as a Loss on debt extinguishment. Additionally, the Company incurred non-cash charges of $10.6 million resulting from the write-off of unamortized Oaktree and Secured Credit Facility transaction costs and fees. The Company also expensed $2.1 million in new third party debt issuance costs associated with certain lenders continued participation in the debt arrangements both prior to and subsequent to the refinancing transaction. |
Loss on debt extinguishment for the three and nine months ended April 30 is as follows: |
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| | Three Months | | | | | | | | | | | | | |
| | Ended April 30, 2014 | | | | | | | | | | | | | |
Call premium - Oaktree Senior Notes | | $ | 28,660 | | | | | | | | | | | | | |
Difference between repayment amount and carrying value - Oaktree Senior Notes | | | 41,631 | | | | | | | | | | | | | |
Unamortized transaction costs- Oaktree Senior Notes | | | 8,635 | | | | | | | | | | | | | |
Unamortized transaction costs- Secured Credit Facility | | | 2,011 | | | | | | | | | | | | | |
New transaction costs - Term Loan, ABL, and Notes | | | 2,067 | | | | | | | | | | | | | |
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Loss on debt extinguishment | | $ | 83,004 | | | | | | | | | | | | | |
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Debt After Refinancing |
In December 2010, Kettle Foods obtained, and Diamond guaranteed, a 10-year fixed rate loan (the “Guaranteed Loan”) in the principal amount of $21.2 million, of which $8.9 million was outstanding as of April 30, 2014. Principal and interest payments were due monthly throughout the term of the loan. The Guaranteed Loan was being used to purchase equipment for the Beloit, Wisconsin plant expansion. Borrowed funds were placed in an interest-bearing escrow account and made available as expenditures were approved for reimbursement. As the cash was used to purchase non-current assets, such restricted cash was classified as non-current on the balance sheet. In December 2012, the remaining balance within the escrow account was released back to the lender and was used to pay down the outstanding loan balance. Also, as part of the paydown, the Company paid a 4% prepayment penalty, which was recorded in Interest expense, net. |
The Guaranteed Loan provides for customary affirmative and negative covenants, which are similar to the covenants under the Secured Credit Facility, as defined below. The financial covenants within the Guaranteed Loan were reset to match those in the Waiver and Third Amendment to its Secured Credit Facility, as described in more detail below. |
Additionally, on February 19, 2014, Diamond closed the Warrant Exercise Agreement, pursuant to which Oaktree agreed to exercise in full its warrant to purchase an aggregate of 4,420,859 shares of Diamond common stock, by paying in cash the exercise price of approximately $44.2 million less a cash exercise and contractual modification inducement fee of $15.0 million. The warrant was issued to Oaktree in connection with the Securities Purchase Agreement, dated May 22, 2012 (“Securities Purchase Agreement”), under which Diamond issued the Oaktree Senior Notes. The $15.0 million inducement fee is included within Warrant exercise fee on the Company’s Condensed Consolidated Statement of Operations. |
The Warrant Exercise Agreement provided that so long as Oaktree and/or its affiliates hold at least 10% of Diamond’s outstanding common stock, Oaktree will have the right to nominate one member of Diamond’s Board of Directors. In addition, until the later of (a) twelve months after Oaktree no longer has the right to nominate a member of Diamond’s Board of Directors or (b) twelve months after any director nominated by Oaktree under the Warrant Exercise Agreement or the Securities Purchase Agreement no longer serves as a director, Oaktree and its affiliates agree not to: acquire or beneficially own more than 30% of the outstanding common stock of Diamond; commence or support any tender offer for Diamond common stock; make or participate in any solicitation of proxies to vote or seek to influence any person with respect to voting its Diamond common stock; publicly announce a proposal or offer concerning any extraordinary transaction with Diamond; form, join or participate in a group for the purpose of acquiring, holding, voting or disposing of any Diamond securities; take any actions that could reasonably be expected to require Diamond to make a public announcement regarding the possibility of such an acquisition, tender offer or proxy solicitation; enter into any agreements with a third party regarding any such prohibited actions; or request Diamond to amend or waive such provisions. Upon the closing of the transactions contemplated by the Warrant Exercise Agreement, the Securities Purchase Agreement, and Diamond’s obligations thereunder, terminated. The common stock issued upon exercise of the warrant will be issued in a private placement pursuant to exemptions from the registration requirements of the Securities Act of 1933 and are covered by a Registration Rights Agreement entered into on May 29, 2012 in connection with the Securities Purchase Agreement. |
The Term Loan Facility will mature in 4.5 years and will amortize in equal quarterly installments in an aggregate annual amount equal to 1.0% of the original principal amount of the Term Loan Facility with the balance payable on the maturity date of the Term Loan Facility. The Term Loan Facility will permit the Company to increase the term loans, or add a separate tranche of term loans, by an amount not to exceed $100 million plus the maximum amount of additional term loans that the Company could incur without its senior secured leverage ratio exceeding 4.50 to 1.00 on a pro forma basis after giving effect to such increase or addition. Amounts outstanding are expected to bear interest at a rate per annum equal to: (i) the Eurodollar Rate (as defined in the Term Loan Facility and subject to a “floor” of 1.00%) plus the applicable margin or (ii) the Base Rate (as defined in the Term Loan Facility), which is the greatest of (a) Credit Suisse’s prime rate, (b) the federal funds effective rate plus 0.50% and (c) the Eurodollar Rate for an interest period of one month plus 1.00%, plus, in each case, the applicable margin to be agreed with the lenders party thereto. |
Loans under the ABL facility would be available up to a maximum amount outstanding at any one time equal to the lesser of (a) $125 million and (b) the amount of the Borrowing Base, in each case, less customary reserves. Under the ABL Facility, the Company has a $20 million sublimit for the issuance of letters of credit, and a Swing Line Facility of up to $12.5 million for same day borrowings. Borrowing Base is defined as (a) 85% of the amount of the Company’s eligible accounts receivable; plus (b) the lesser of (i) 70% of the book value of eligible inventory in the US and (ii) 85% times the net orderly liquidation value of Diamond’s eligible inventory in the US; less (c) in each case, customary reserves. |
Under the ABL Facility, Diamond may elect that the loans bear interest at a rate per annum equal to: (i) the Base Rate plus the applicable margin; or (ii) the LIBOR Rate plus the applicable margin. “Base Rate” means the greatest of (a) the Federal Funds Rate plus 0.5%, (b) the LIBOR Rate (which rate shall be calculated based upon an interest period of 1 month and shall be determined on a daily basis), plus 1.00%, and (c) the rate of interest announced, from time to time, by Wells Fargo at its principal office in San Francisco as its “prime rate”. The LIBOR Rate shall be available for interest periods of one week or, one, two, three or six months and, if all lenders agree, twelve months. |
The Term Loan Facility and ABL Facility provide for customary affirmative and negative covenants. The Term Loan Facility has customary cross default provisions and the ABL Facility contains cross-acceleration provisions, in each case that may be triggered if Diamond fails to comply with obligations under its other credit facilities or indebtedness. The Term Loan Facility has a first priority perfected lien on substantially all property, plant and equipment, capital stock, intangibles and second priority lien on the ABL Priority Collateral, subject to customary exceptions. The ABL Facility requires Diamond to maintain a minimum fixed charge coverage ratio of 1.1:1 if at any time excess availability is less than 10% of maximum availability; and requires Diamond to apply substantially all cash collections to reduce outstanding borrowings under the ABL Facility if excess availability falls below 12.5% of maximum availability for a period of 5 business days. The ABL Facility is secured by a first-priority lien on accounts receivable, inventory, cash and deposit accounts and a second-priority lien on all real estate, equipment and equity interests of the Company under, and guarantors of, the ABL Facility. |
The Notes, which will mature on March 15, 2019, were offered only to (i) qualified institutional buyers in reliance on Rule 144A of the Securities Act of 1933, as amended (“Securities Act”), and (ii) to certain non-U.S. persons in offshore transactions in reliance on Regulation S of the Securities Act. The initial issuance and sale of the Notes were not registered under the Securities Act, and the Notes may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and the registration or qualification requirements of other applicable securities laws. The terms of the Notes do not provide for registration rights. Interest on the Notes will be payable on March 15 and September 15 of each year, commencing September 15, 2014. On or after March 15, 2016, Diamond may redeem all or a part of the Notes at a price equal to 103.500% of the principal amount of the Notes, plus accrued and unpaid interest, with such optional redemption prices decreasing to 101.750% on and after March 15, 2017 and 100.000% on and after March 15, 2018. Before March 15, 2016, Diamond may redeem some or all of the Notes at a price equal to 100.000% of the principal amount of the Notes redeemed, plus accrued and unpaid interest to the redemption date and the make-whole premium. Before March 15, 2016, Diamond may redeem up to 35% of the Notes with the net cash proceeds of certain equity offerings at a redemption price equal to 107.000% of the aggregate principal amount thereof, plus accrued and unpaid interest to the date of redemption. If Diamond experiences a change of control, Diamond must offer to purchase for cash all or any part of each holder’s Notes at a purchase price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest, if any. The indenture pursuant to which the Notes were issued contains customary covenants that, among other things, limit Diamond’s ability and Diamond’s restricted subsidiaries’ ability to incur additional indebtedness, make restricted payments, enter into transactions with affiliates, create liens, pay dividends on or repurchase stock, make specified types of investments, and sell all or substantially all of their assets or merge with other companies. Each of the covenants is subject to a number of important exceptions and qualifications. |
For the three and nine months ended months ended April 30, 2014, the blended interest rate for the Company’s consolidated borrowings, including obligations under the Company’s refinanced debt capital structure and excluding the Oaktree Senior Notes, was 5.43% and 5.94%, respectively. As of April 30, 2014, the Company was compliant with financial and reporting covenants under the new refinanced debt structure. |
Debt Before Refinancing |
The following is a description of the Company’s debt outstanding before the refinancing described above in “Description of Refinancing” and “Debt After Refinancing.” |
In February 2010, Diamond entered into an agreement (the “Secured Credit Agreement”) with a syndicate of lenders for a five-year $600 million secured credit facility (the “Secured Credit Facility”). Diamond’s Secured Credit Facility initially consisted of a $200 million revolving credit facility and a $400 million term loan. In March 2011, the syndicate of lenders approved Diamond’s request for a $35 million increase in the revolving credit facility to $235 million, under the same terms. In August 2011, the syndicate of lenders approved Diamond’s request for a $50 million increase in the revolving credit facility to $285 million, under the same terms. |
The Secured Credit Facility and the Securities Purchase Agreement provided for customary affirmative and negative covenants, and cross default provisions that could be triggered, if Diamond failed to comply with obligations under the other credit facilities or indebtedness. The Secured Credit Facility and the Securities Purchase Agreement included a covenant that restricted the amount of other indebtedness (including capital leases and purchase money obligations for fixed or capital assets), to no more than $25 million. The accounting treatment for the seven-year equipment lease for the Salem, Oregon plant (the “Kettle U.S. Lease”) and the five-year equipment lease for the Norfolk, United Kingdom plant (the “Kettle U.K. Lease”) caused the Company to be in default of the covenants limiting other indebtedness. These defaults were waived, with respect to the Kettle U.K. Lease on July 27, 2012 (“Fourth Amendment”) and with respect to the Kettle U.S. Lease on August 23, 2012 (“Fifth Amendment”). Additionally, the Secured Credit Facility and the Securities Purchase Agreement were each amended to allow the Company to incur up to $31 million of capital leases and purchase money obligations for fixed or capital assets, which amount was reduced from and after December 31, 2013 (a) to $25 million under the Secured Credit Facility and (b) to $27.5 million under the Securities Purchase Agreement. As a result of the refinancing, as of April 30, 2014, the Company no longer had outstanding obligations under the Secured Credit Facility. |
In March 2012, Diamond reached an agreement with its lenders to forbear from seeking any remedies under the Secured Credit Facility with respect to specified existing and anticipated non-compliance with the credit agreement and to amend the credit agreement (“Second Amendment”). Under the amended credit agreement, Diamond had continued access to its existing revolving credit facility through a forbearance period (initially through June 18, 2012) subject to its compliance with the terms and conditions of the amended credit agreement. During the forbearance period, the interest rate on borrowings increased. The credit agreement required Diamond to suspend dividend payments to stockholders. In addition, Diamond paid a forbearance fee of 25 basis points to its lenders. The forbearance period concluded on May 29, 2012, when Diamond closed agreements to recapitalize our balance sheet with an investment by Oaktree. |
In May 2012, Diamond entered into the Waiver and Third Amendment to its Secured Credit Facility (the “Third Amendment”), pursuant to which the revolving credit facility initially was reduced from $285 million to $255 million. The Third Amendment provided for subsequent further reductions in the revolving line of credit in July 2013 and on January 31, 2014. In May 2012, Diamond made a $100 million pre-payment on the term loan facility as part of the Third Amendment. In addition, scheduled principal payments on the term loan facility were $0.9 million (due quarterly), with the remaining principal balance and any outstanding loans under the revolving credit facility to be repaid on February 25, 2015. Substantially all of the Company’s tangible and intangible assets were considered collateral security under the Secured Credit Facility. Additionally, the Third Amendment provided for a lower level of total bank debt, initially at $475 million, along with substantial covenant relief. In the second quarter of fiscal 2013, these covenants reset from the levels set forth in the Third Amendment (initially 4.70 to 1.00 for the Consolidated Senior Leverage Ratio declining each quarter, ultimately to 3.25 to 1.00 in the quarter ending July 31, 2014, and thereafter, and 2.00 to 1.00 for the fixed charge coverage ratio). The Third Amendment included a covenant requiring that Diamond have at least $20 million of cash, cash equivalents and revolving credit availability at all times beginning February 1, 2013. In addition, the Third Amendment required a $100 million pre-payment of the term loan facility, while reducing the remaining scheduled principal payments from $10 million to $0.9 million. The Third Amendment also amended the definition of “Applicable Rate” under the Secured Credit Agreement (which sets the margin over the London Interbank Offered Rate (“LIBOR”) and the base rate at which loans under the Secured Credit Agreement bear interest). Under the Third Amendment, initially, Eurodollar rate loans bore interest at 5.50% plus the LIBOR for the applicable loan period, and base rate loans bore interest at 450 basis points plus the highest of (i) the Federal Funds Rate plus 50 basis points, (ii) the Prime Rate, (iii) Eurodollar Rates plus 100 basis points. The LIBOR rate was subject to a LIBOR floor, initially 125 basis points (the “LIBOR Floor”). The applicable rate would decline, if and when Diamond were to achieve reductions in its ratio of senior debt to EBITDA, as defined in the Third Amendment. The Third Amendment also eliminated the requirement that proceeds of future equity issuances be applied to repay outstanding loans and waived certain covenants in connection with Diamond’s restatement of its consolidated financial statements. As a result of the refinancing noted above, the Company had no indebtedness outstanding under the Secured Credit Facility as of April 30, 2014. |
On May 29, 2012, Diamond received an investment from Oaktree Capital Management, L.P. (“Oaktree”). The Oaktree investment initially consisted of $225 million of newly-issued Oaktree Senior Notes and a warrant to purchase approximately 4.4 million shares of Diamond common stock. The Oaktree Senior Notes would have matured in 2020 and bore interest at 12% per year that would have been paid-in-kind at Diamond’s option for the first two years. Oaktree’s warrant became exercisable at $10 per share starting on March 1, 2013. On February 19, 2014, Oaktree exercised the warrants. |
The Secured Credit Facility provides for customary affirmative and negative covenants and cross default provisions that may be triggered, if Diamond fails to comply with obligations under its other credit facilities or indebtedness. Beginning on April 30, 2014, its senior debt to consolidated EBITDA ratio (“Consolidated Senior Leverage Ratio”), as defined in the Third Amendment, will be limited to no more than 4.70 to 1.00 and its fixed charge coverage ratio to no less than 2.00 to 1.00. The Consolidated Senior Leverage Ratio covenant will decline each quarter, ultimately to 3.25 to 1.00 in the quarter ending July 31, 2014. |