NOTE 4 — LONG-TERM DEBT

Long-term debt consists of the following:

 

 C:  C:  C:  C: 

(in thousands)		September 30, 2013				December 31, 2012
Series A-1 Notes		$	—			$	700,000
Series A-2 Notes			157,500				317,500
Senior Secured Term Loan			897,750				—
Unamortized original issue discount associated with Senior Secured Term Loan			(8,491	)			—
Amended ABL Facility			22,000				25,000
Capital lease obligations			31				210
			1,068,790				1,042,710
Less: current maturities			(31,031	)			(25,195	)
		$	1,037,759			$	1,017,515

Senior Secured Term Loan. On April 5, 2013, the Company entered into a senior secured credit agreement (the “Senior Secured Term Loan”), among Apria, as borrower, Sky Acquisition LLC, as parent, the other guarantors party thereto from time to time, Bank of America, N.A., as administrative agent, U.S. Bank National Association as collateral agent, certain other agents party thereto and a syndicate of financial institutions and institutional lenders.

On April 5, 2013, the Company borrowed $900.0 million in aggregate principal amount of term loans under the Senior Secured Term Loan. At the Company’s option, the Company may borrow additional term loans under the Senior Secured Term Loan, subject to certain customary conditions, including consent of the lenders providing such additional term loans, in an amount not to exceed $175.0 million, plus the aggregate principal amount of voluntary prepayments of term loans on or prior to such time, plus additional amounts subject to compliance on a pro forma basis with certain financial ratio tests.

 

Borrowings under the Senior Secured Term Loan bear interest at a fluctuating rate per annum equal to, at the Company’s option (i) a base rate equal to the highest of (a) the federal funds rate plus 1/2 of 1%, (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America, N.A. as its “prime rate” and (c) the one month LIBOR Rate plus 1.00% (provided that in no event shall such base rate with respect to the initial Term Loans be less than 2.25% per annum), in each case plus an applicable margin of 4.50% or (ii) a LIBOR Rate for the applicable interest period (provided that in no event shall such LIBOR rate with respect to the initial Term Loans be less than 1.25% per annum) plus an applicable margin of 5.50%.

The Senior Secured Term Loan will mature on April 5, 2020 and will amortize in equal quarterly installments in aggregate annual amounts equal to 1% of the original principal amount of term loans, with the balance payable on the final maturity date; provided that the Senior Secured Term Loan provides the right for individual lenders to agree to extend the maturity date of their outstanding term loans upon the Company’s request and without the consent of any other lender, subject to customary terms and conditions.

All the Company’s obligations under the Senior Secured Term Loan (i) are unconditionally guaranteed by the Company’s parent and substantially all of its existing and future, direct and indirect, wholly-owned domestic restricted subsidiaries and (ii) are secured, subject to certain exceptions, by substantially all of the Company’s assets and the assets of the guarantors.

The Senior Secured Term Loan is entitled to a priority of payment over the Series A-2 Notes in certain circumstances, including upon any acceleration of the obligations in respect of the Senior Secured Term Loan, the Series A-2 Notes or any bankruptcy or insolvency event or default with respect to Apria or any guarantor of the Senior Secured Term Loan and the Series A-2 Notes.

The Senior Secured Term Loan includes a financial maintenance covenant that prohibits the Company’s consolidated first priority net leverage ratio as of the last day of any test period of four consecutive fiscal quarters (commencing with the test period ending September 30, 2013) to exceed 5.50 to 1.00.

The Senior Secured Term Loan also includes customary negative covenants that, subject to certain exceptions, limit the Company’s ability and the ability of the Company’s parent and subsidiaries to, among other things: incur liens; make investments or loans; incur, assume or permit to exist additional indebtedness or guarantees; and pay dividends, make payments or redeem or repurchase capital stock.

Under the terms of the Senior Secured Term Loan, outstanding loans under the Senior Secured Term Loan may be accelerated if more than $75.0 million of the Series A-2 Notes remain outstanding on or after September 2, 2014.

The Company used proceeds from the borrowings under the Senior Secured Term Loan to: (i) redeem all of the Company’s outstanding 11.25% Senior Secured Notes due 2014 (Series A-1) (the “Series A-1 Notes”); (ii) redeem an aggregate principal amount of $160.0 million of the Company’s outstanding 12.375% Senior Secured Notes due 2014 (Series A-2) (the “Series A-2 Notes” and, together with the Series A-1 Notes, the “Notes”) and (iii) pay fees and expenses associated with the entering into the Senior Secured Term Loan and the redemption of the Notes.

In connection with the redemption of the Series A-1 Notes and a portion of the Series A-2 Notes, the Company paid $24.6 million of premiums to the holders of such Series A-1 Notes and Series A-2 Notes. In addition, the Company wrote-off $19.6 million of unamortized debt issuance costs related to the Series A-1 Notes and the portion of the Series A-2 Notes that were redeemed. Such amounts are included in Loss on Early Retirement of Debt on the Company’s Condensed Consolidated Statement of Operations for the nine months ended September 30, 2013.

Borrowings under the Senior Secured Term Loan were incurred with an original issue discount of $9.0 million. The Company incurred $10.6 million of debt issuance costs in connection with the Senior Secured Term Loan.

Series A-1 Notes and Series A-2 Notes. Series A-1 Notes and Series A-2 Notes were issued by us in May 2009 and August 2009, respectively. On April 5, 2013, all Series A-1 Notes and $160.0 million of Series A-2 Notes were refinanced using the proceeds of the Senior Secured Term Loan as described above. The Series A-1 Notes and the Series A-2 Notes bear interest at a rate equal to 11.25% per annum and 12.375% per annum, respectively. The indenture governing the Series A-1 Notes and the Series A-2 Notes, among other restrictions, limits our ability and the ability of its restricted subsidiaries to:

 

•

incur additional debt;

 

•

pay dividends and make other distributions;

 

•

make certain investments;

 

•

repurchase the Company stock;

 

•

incur certain liens;

 

•

enter into transactions with affiliates;

 

•

merge or consolidate;

 

•

enter into agreements that restrict the ability of the Company’s subsidiaries to make dividends or other payments to us; and

 

•

transfer or sell assets.

Subject to certain exceptions, the indenture governing the Series A-2 Notes permits us and our restricted subsidiaries to incur additional indebtedness, including senior indebtedness and secured indebtedness.

The remaining balance of the Series A-2 Notes will mature on November 1, 2014. On and after November 1, 2011, we may redeem the Series A-2 Notes, in whole or in part, at the redemption prices described below:

 

Series A-2 Notes		Percentage
November 1, 2012			103.094	%
November 1, 2013 and thereafter			100.000	%

Substantially all of the Company’s 100% owned subsidiaries (the “Guarantors”) jointly and severally, unconditionally guarantee the $900.0 million Senior Secured Term Loan and the $157.5 million Series A-2 Notes on a senior secured basis. The Guarantors also guarantee Apria’s ABL Facility.

Amended and Restated ABL Facility. On August 8, 2011, we entered into a senior secured asset-based revolving credit facility, or ABL Facility, with Bank of America, N.A., as administrative agent and collateral agent and a syndicate of financial institutions and institutional lenders. The ABL Facility amended and restated our prior senior secured asset-based revolving credit facility dated October 28, 2008, which provided for a revolving credit financing of up to $150.0 million.

The ABL Facility provides for revolving credit financing of up to $250.0 million, subject to borrowing base availability, with a maturity of the earlier of (a) five years and (b) 90 days prior to the earliest maturity of our outstanding Senior Secured Term Loan and Series A-2 Notes, and includes both a letter of credit and swingline loan sub-facility. The borrowing base at any time is equal to the sum (subject to certain reserves and other adjustments) of (i) 85% of eligible receivables, (ii) the least of (a) 85% of eligible self-pay accounts, (b) 10% of the borrowing base, (c) $25,000,000 and (d) the aggregate amount of self-pay accounts collected within the previous 90 days, (iii) the lesser of (a) 85% of eligible accounts invoiced but unpaid for more than 180 days but less than 360 days and (b) 10% of eligible accounts invoiced but unpaid for 180 days or less and (iv) the lesser of (a) 85% of the net orderly liquidation value of eligible inventory and (b) $35.0 million.

Borrowings under our ABL Facility bear interest at a rate per annum equal to, at our option, either (a) a base rate determined by reference to the higher of (1) the prime rate of Bank of America, N.A. and (2) the federal funds effective rate plus 1/2 of 1% (“Base Rate”), plus an applicable margin (currently 1.25%) or (b) a LIBOR rate determined by reference to LIBOR, adjusted for statutory reserve requirements, plus an applicable margin (currently 2.25%). The applicable margin for borrowings under our ABL Facility is subject to (a) 25 basis points step ups and step downs based on average excess availability under the ABL Facility and (b) a step down of 25 basis points based on achieving a consolidated fixed charge coverage ratio greater than 1.75 to 1.00. In addition to paying interest on outstanding amounts under our ABL Facility, we are required to pay a commitment fee, in respect of the unutilized commitments thereunder, ranging from 0.375% to 0.50% per annum, which fee will be determined based on utilization of our ABL Facility (increasing when utilization is low and decreasing when utilization is high). We also pay customary letter of credit fees equal to the applicable margin on LIBOR loans and other customary letter of credit and agency fees.

From time to time, we issue letters of credit in connection with our business, including commercial contracts, leases, insurance and workers’ compensation arrangements. If the holders of our letters of credit draw funds under such letters of credit, it would increase our outstanding senior secured indebtedness.

As of September 30, 2013, there was $22.0 million outstanding under the ABL Facility, outstanding letters of credit totaled $25.0 million and additional availability under the ABL Facility, subject to the borrowing base, was $203.0 million. As of September 30, 2013, the available borrowing base did not constrain our ability to borrow the entire $203.0 million available borrowing capacity under our ABL Facility. At September 30, 2013, we were in compliance with all of the financial covenants required by the credit agreement governing the ABL Facility. As of November 8, 2013, there was approximately 62.9 million outstanding under the ABL Facility.

Interest Paid and Accrued Interest. Interest paid on debt totaled $16.1 million and $0.7 million for the three months ended September 30, 2013 and 2012, respectively, and $77.9 and $61.1 million for the nine months ended September 30, 2013 and 2012, respectively. In addition, the Company paid $24.6 million of premiums to the holders of such Series A-1 Notes and Series A-2 Notes in connection with the redemption of the Series A-1 Notes and a portion of the Series A-2 Notes for the nine months ended September 30, 2013. Accrued interest was $23.7 million at September 30, 2013 and $19.9 million at December 31, 2012.

Loss on Early Retirement of Debt. The Company paid $24.6 million of premiums to the holders of the Series A-1 Notes and Series A-2 Notes in connection with the redemption of the Series A-1 Notes and a portion of the Series A-2 Notes for the nine months ended September 30, 2013. In addition, the Company wrote-off $19.6 million of unamortized debt issuance costs related to the Series A-1 Notes and the portion of the Series A-2 Notes that were repaid for the nine months ended September 30, 2013.

Maturities of long-term debt and the ABL Facility are as follows:

 

Year Ending December 31,		(in thousands)
2013		$	24,281
2014			166,500
2015			9,000
2016			9,000
2017			9,000
Thereafter			859,500
		$	1,077,281

The Company and its major equity holders, including the Sponsor and its affiliates, may from time to time, depending upon market conditions, seek to refinance or repurchase our debt securities or loans in privately negotiated or open market transactions, by tender offer or otherwise.