| Debt | Debt
As of
August 27, 2021
August 28, 2020
Convertible Senior Notes
$
203,992
$
195,573
LED Purchase Price Note
125,000
—
ABL Credit Agreement
25,000
—
Other
11,846
—
365,838
195,573
Less current debt
(25,354
)
—
Long-term debt
$
340,484
$
195,573
Reference Rate Reform In July 2017, the Financial Conduct Authority (which regulates LIBOR) announced it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. As a result, the Federal Reserve Board and the Federal Reserve Bank of New York organized the Alternative Reference Rates Committee, which identified the Secured Overnight Financing Rate (“SOFR”) as its preferred alternative to LIBOR in derivatives and other financial contracts. On March 5, 2021, the Financial Conduct Authority confirmed a partial extension of this deadline announcing that it will cease the publication of the one-week and two-month USD LIBOR settings immediately following December 31, 2021. The remaining U.S. dollar LIBOR settings will continue to be published until June 30, 2023. For each of our debt instruments that provide for interest based on LIBOR, the SOFR, as published by the Federal Reserve Bank of New York, is listed as the alternative index to replace LIBOR if a different alternative index is not agreed to prior such cessation of the LIBOR rate. Convertible Senior Notes In February 2020, we issued $250.0 million in aggregate principal amount of 2.25% convertible senior notes due 2026 (the “2026 Notes”). The 2026 Notes are general unsecured obligations, bear interest at an annual rate of 2.25% per year, payable semi-annually on February 15 and August 15, and mature on February 15, 2026, unless earlier converted, redeemed or repurchased. The 2026 Notes are governed by an indenture (the “Indenture”) between us and U.S. Bank National Association, as trustee. The initial conversion rate of the 2026 Notes is 24.6252 ordinary shares per $1,000 principal amount of notes, which represents an initial conversion price of approximately $40.61 per ordinary share. The conversion rate is subject to adjustment upon the occurrence of certain specified events as set forth in the Indenture. Conversion Rights : Holders of the 2026 Notes may convert them under the following circumstances:
i.
during any fiscal quarter commencing after the fiscal quarter ended on May 28, 2020 (and only during such fiscal quarter) if the last reported sale price per ordinary share exceeds 130% of the conversion price for at least 20 trading days in the 30 consecutive trading days ending on the last trading day of the immediately preceding fiscal quarter;
ii.
during the five consecutive business days immediately after any 10 consecutive trading day period (such 10 consecutive trading day period, the “Measurement Period”) in which the trading price per $1,000 principal amount of notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price per ordinary share on such trading day and the conversion rate on such trading day;
iii.
on or after August 15, 2025 until the close of business on the second scheduled trading day immediately before the maturity date;
iv.
upon the occurrence of certain corporate events or distributions on our ordinary shares, as provided in the Indenture; or
v.
the 2026 Notes are called for redemption. Upon conversion, we will pay or deliver, as applicable, cash, ordinary shares or a combination of cash and ordinary shares at our election. Our intent is to settle in cash the principal amount of our convertible notes upon conversion and may, at our option, settle any excess of the conversion value over the principal amount in cash, ordinary shares or any combination thereof. Upon the occurrence of a “make-whole fundamental change” (as defined in the Indenture), we will in certain circumstances increase the conversion rate for a specified period of time. In addition, upon the occurrence of a “fundamental change” (as defined in the Indenture), holders of the 2026 Notes may require us to repurchase their notes at a cash repurchase price equal to the principal amount of the 2026 Notes to be repurchased, plus accrued and unpaid interest. If any taxes imposed or levied by or on behalf of the Cayman Islands (or certain other jurisdictions described in the Indenture) are required to be withheld or deducted from any payments or deliveries made under or with respect to the 2026 Notes, then, subject to certain exceptions, we will pay or deliver to the holder of each note such additional amounts as may be necessary to ensure that the net amount received by the beneficial owner of such note after such withholding or deduction (and after withholding or deducting any taxes on the additional amounts) will equal the amounts that would have been received by such beneficial owner had no such withholding or deduction been required. Cash Redemption at Our Option : We have the right to redeem the 2026 Notes, in whole or in part, at our option at any time, and from time to time, from February 21, 2023 through the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid interest. However, the repurchase right is only applicable if the last reported per share sale price of our ordinary shares exceeds 130% of the conversion price on each of at least twenty trading days during the thirty consecutive trading days ending on, and including, the trading day immediately before the redemption notice date for such redemption. Other : In connection with the issuance of the 2026 Notes, we separated the par value of the 2026 Notes into liability and equity components. The liability component of $197.5 million was calculated by using a discount rate of 6.53%, which was our borrowing rate on the date of the issuance of the 2026 Notes for a similar debt instrument without the conversion feature. The equity component of $52.5 million, representing the conversion option, was determined by deducting the liability component from the par value of the 2026 Notes. The equity component of the 2026 Notes is included in additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification, which we reassess every reporting period. The difference between the debt recorded at issuance and its principal amount is accreted using the effective interest method through interest expense over the term of the 2026 Notes. Debt issuance costs for the 2026 Notes were $8.0 million, consisting of initial purchasers' discount and other issuance costs, and were allocated to the liability and equity components using the same proportions as the allocation of the proceeds from the 2026 Notes. Transaction costs attributable to the liability component were $6.3 million and are netted with the debt balance and amortized to interest expense over the term of the 2026 Notes. Transaction costs attributable to the equity component were $1.7 million and are netted with the equity component in additional paid-in-capital. Interest expense for the 2026 Notes consisted of 2.25% contractual stated interest of $5.6 million and $3.1 million in 2021 and 2020, respectively, and amortization of discount and issuance costs of $8.4 million and $4.4 million in 2021 and 2020, respectively, resulting in an effective interest rate of 7.06%. As of both August 27, 2021 and August 28, 2020, the carrying amount of the equity components of the 2026 Notes, which are included in additional paid-in-capital, was $ 50.8 million. LED Purchase Price Note In connection with the acquisition of the LED Business in March 2021, we issued an unsecured promissory note to Cree in the amount of $125 million. The LED Purchase Price Note bears interest at LIBOR plus 3.0%, payable quarterly, and is due on August 15, 2023. The LED Purchase Price Note requires that we maintain a secured leverage ratio not in excess of 3.50:1.00 as of the end of each fiscal quarter. See “Business Acquisitions – LED Business.” Asset-Based Lending Credit Agreement In December 2020, our subsidiaries, SMART Modular, SMART EC and Penguin Computing, Inc. (collectively the “ABL Borrowers”), and certain other U.S. subsidiaries of the Company party thereto as guarantors (such other U.S. subsidiaries, together with the ABL Borrowers, collectively the “ABL Loan Parties”) entered into a Loan, Guaranty and Security Agreement (the “ABL Credit Agreement”), which provides for a senior secured asset-based revolving credit facility in an aggregate principal amount of up to $100 million. Under the ABL Credit Agreement, we have the option to increase the total amount available to $150 million, subject to certain conditions, including obtaining commitments from one or more lenders. The ABL Credit Agreement, which expires on December 23, 2023, provides that up to $30 million of revolving credit facility is available for issuances of letters of credit, and allows for swingline loans in an amount not to exceed $15 million. There are no requirements to make any scheduled amortization payments of drawn amounts. Borrowings under the ABL Credit Agreement are available based upon monthly (or, in certain cases, weekly) borrowing base certifications valuing eligible inventory and eligible accounts receivable, as reduced by certain reserves in effect from time to time. Interest and Fees : The ABL Credit Agreement bears interest at a rate per annum equal to either, at the ABL Borrowers’ option, a LIBOR rate or a base rate, in each case plus an applicable margin. The applicable margin is (i) 1.75% per annum with respect to LIBOR borrowings, and 0.75% per annum with respect to base rate borrowings when average daily Availability, as defined in the ABL Credit Agreement, is equal to or greater than $50 million, (ii) 2.00% per annum with respect to LIBOR borrowings, and 1.00% per annum with respect to base rate borrowings when average daily Availability is less than $50 million and greater than or equal to $35 million and (iii) 2.25% per annum with respect to LIBOR borrowings, and 1.25% per annum with respect to base rate borrowings when average daily Availability is less than $35 million. We are subject to a monthly unused facility fee (i) 0.35%, if average daily Revolver Usage (as defined in the ABL Credit Agreement) was less than 50% of the Commitments (as defined in the ABL Credit Agreement) during the preceding calendar month, or (ii) 0.25%, if average daily Revolver Usage was equal to or greater than 50% of the Commitments during such month. Covenants : The ABL Credit Agreement contains customary affirmative and negative covenants and restrictions typical for a financing of this nature that, among other things, restrict the ABL Loan Parties’ ability to incur additional debt, pay dividends and make distributions, make certain investments and acquisitions, enter into certain transactions, repurchase its stock and prepay certain indebtedness, create liens, enter into agreements with affiliates and transfer and sell material assets and merge or consolidate. In the event that certain minimum availability thresholds are not met on the last day of any period of four fiscal quarters, the ABL Borrowers will be required to maintain (i) a minimum Borrower Fixed Charge Coverage Ratio (as defined in the ABL Credit Agreement) of not less than 1.0 to 1.0 and (ii) a minimum Global Fixed Charge Coverage Ratio (as defined in the ABL Credit Agreement) of not less than 1.0 to 1.0, in each case, as of such last day of any period of four fiscal quarters. Subject to the Intercreditor Agreement (as defined below), non-compliance with one or more of the covenants and restrictions could result in the full or partial principal balance of the ABL Credit Agreement becoming immediately due and payable and termination of the commitments available thereunder. Security : The ABL Credit Agreement is jointly and severally guaranteed on a senior basis by the ABL Loan Parties. In addition, the ABL Credit Agreement is secured by a pledge of the capital stock of, or equity interests in, the ABL Loan Parties and by substantially all of the assets of the ABL Loan Parties subject to customary exceptions. In connection with the ABL Credit Agreement, the ABL Loan Parties entered into a customary intercreditor agreement (the “Intercreditor Agreement”) which governs how the collateral securing the respective obligations under the ABL Credit Agreement and the Amended Credit Agreement will be treated among the secured parties. Pursuant to the ABL Credit Agreement and Intercreditor Agreement, the obligations under the ABL Credit Agreement are secured by ( i ) a first-priority security interest, subject to certain customary exceptions, in assets held by the ABL Loan Parties consisting of accounts receivable, inventory and intangible assets to the extent attached to the foregoing, books and records related to the foregoing and the proceeds thereof and ( ii ) a second-priority security interest, subject to certain customary exceptions, in substantially all other present and future tangible and intangible assets held by the ABL Loan Parties and proceeds of the foregoing; and the obligations under the Amended Credit Agreement are secured by ( i ) a second-priority security interest, subject to certain customary exceptions, in assets held by the ABL Loan Parties consisting of accounts receivable, inventory and intangible assets to the extent attached to the foregoing, books and records related to the foregoing and the proceeds thereof and ( ii ) a first-priority security interest in, subject to certain customary exceptions, substantially all other present and future tangible and intangible assets held by the Loan Parties and proceeds of the foregoing. Amended Credit Agreement In March 2020, three of our subsidiaries, SMART Worldwide Holdings, Inc. (“SMART Worldwide”); SMART Modular Technologies (Global), Inc. (“SMART Global”); and SMART Modular Technologies, Inc. (“SMART Modular”) (collectively, “Borrowers”) entered into a third amended and restated credit agreement (“Amended Credit Agreement”), which provides for $50 million of revolving loans with a maturity date of March 6, 2025. Interest : Amounts outstanding under the Amended Credit Agreement bear interest at a rate of:
•
When the First Lien Leverage Ratio, as defined in the Amended Credit Agreement, is greater than 2.25 to 1.00:
o
3.75% per annum with respect to LIBOR borrowings and
o
2.75% per annum with respect to base rate borrowings
•
When the First Lien Leverage Ratio is less than or equal to 2.25 to 1.00:
o
3.50% per annum with respect to LIBOR borrowings and
o
2.50% per annum with respect to base rate borrowings. Covenants : The Amended Credit Agreement contains various representations and warranties and affirmative and negative covenants that are usual and customary for loans of this nature including, among other things, limitations on the Credit Group’s ability to incur debt and liens, issue preferred equity, engage in certain transactions, make investments, dispose of assets, pay dividends and engage in certain transactions with affiliates. The Amended Credit Agreement also requires the financial maintenance covenant included therein to be set at a First Lien Leverage Ratio of 3.50 to 1.00 and to be applicable only if drawn revolving loans (plus issued letters of credit in excess of $10 million) outstanding as of the last day of any quarter exceed 30% of the aggregate revolving commitments available under the Amended Credit Agreement. Security : The Amended Credit Agreement is jointly and severally guaranteed on a senior basis by certain subsidiaries of Global (excluding, among other subsidiaries, SMART Modular Technologies Sdn. Bhd. (“SMART Malaysia”)). In addition, the Amended Credit Agreement is secured by a pledge of the capital stock of, or equity interests in, most of the subsidiaries of SMART Worldwide (including, without limitation, SMART Malaysia, Penguin Computing; SMART EC and SMART Wireless) and by substantially all of the assets of the subsidiaries of SMART Worldwide, excluding the assets of SMART Malaysia and certain other subsidiaries. Other Through one of our Brazil subsidiaries, we are party to a credit facility with the Funding Authority for Studies and Projects (“FINEP”), an organization of the Brazilian federal government under the Ministry of Science, Technology and Innovation devoted to funding science and technology in Brazil. The facility provides for borrowings of up to R$102.2 million (or $20.0 million) for investments in technology innovation projects used in infrastructure and research and development conducted in Brazil as well as for the acquisition of equipment. The facility bears interest bears interest at 2.8% per annum and provides for unused commitment fees of 0.1% per month. The agreement also provides for initial administration fees of 1.09%, deducted from each advance of funds. Amounts outstanding and available under the facility are guaranteed by two unrelated parties, subject to a guarantee fee of 1.5% per annum. The facility includes customary conditions and can be terminated in the event of a change of effective control. Amounts borrowed under the agreement are due in monthly installments of principal and interest beginning in June 2022, with the final payment due in December 2027. On December 30, 2020, we borrowed R$60.7 million (or $11.9 million) under the agreement and, as of August 27, 2021, the outstanding balance was $11.8 million. Maturities of Debt As of August 27, 2021, maturities of debt were as follows:
2022
$
354
2023
127,122
2024
2,122
2025
2,122
2026
252,122
Thereafter
3,004
Less unamortized discount and issuance costs
(46,008
)
$
340,838
Maturities in the table above exclude amounts drawn under our ABL Credit Agreement, which expires in December 2023. As of August 27, 2021, there was $25.0 million included in current debt for amounts drawn under this facility. |
