Quarterly report pursuant to Section 13 or 15(d)

Note 5 - Debt

v3.19.3
Note 5 - Debt
9 Months Ended
Sep. 29, 2019
Notes to Financial Statements  
Debt Disclosure [Text Block]
5.
Deb
t
 
 
(a) Revolving credit and long-term debt facilities 
 
The Company borrows money under an Amended and Restated Revolving Credit and Security Agreement with PNC Bank, National Association (“PNC”), which governs the Company’s Revolving Credit Facility (“PNC Facility”). The PNC Facility has a term ending on
November 8, 2023.
Advances made under the PNC Facility bear interest at the U.S. base rate plus an applicable margin ranging from
0.75%
to
1.25%,
or LIBOR plus an applicable margin ranging from
2.5%
to
3.00%.
The base commercial lending rate should approximate U.S. prime rate.  
 
The Company also borrows money under a Financing Agreement (the “Financing Agreement”), by and among us and certain of our subsidiaries, the lenders party to the Financing Agreement from time to time (collectively, the “Lenders”), and TCW Asset Management Company LLC, as collateral agent for the Lenders (“TCW”), which governs a term loan A facility (“Term A Loan Facility” and, together with the PNC Facility, the “Credit Facilities”) and previously governed a term loan B facility (the “Term Loan B Facility”) until it was paid in full on
July 3, 2019.
The Term A Loan Facility matures on
November 8, 2023 (
the “Maturity Date”). The Term Loan A Facility bears interest LIBOR plus an applicable margin of
8.75%
through
June 30, 2020,
and borrowings under the Financing Agreement will thereafter bear interest at LIBOR plus an applicable margin ranging from
7.25%
to
8.75%.
Payments made under the Term Loan A Facility at any time prior to the Maturity Date (other than scheduled amortization payments and mandatory prepayments) are subject to an applicable premium equal to the amount of such payment multiplied by (i)
3.00%
in the event that such payment occurs before
November 8, 2019, (
ii)
2.00%
in the event that such payment occurs after
November 8, 2019
and on or before
November 8, 2020
and (iii)
1.00%
in the event that such payment occurs after
November 8, 2020
and on or before
November 8, 2021.
No
such applicable premium is payable for any payment of loans made under the Term Loan A Facility occurring after
November 8, 2021.
 
On
August 8, 2019,
the Company and certain of its subsidiaries entered into that certain Amendments
No.
2
to the Amended and Restated Revolving Credit and Security Agreement (the “PNC Amendment
No.
2”
) and that certain Amendment
No.
3.
to the Financing Agreement (the “TCW Amendment
No.
3”
).  The PNC Amendment
No.
2,
among other things, (i) increased the total amount available for borrowings under the PNC Facility to
$65,000,
(ii) provided for borrowings of up to
$15,000
on assets located in Mexico, (iii) provided that borrowings under the PNC Facility bear interest at the U.S. base rate plus an applicable margin ranging from
0.75%
to
1.25%,
or LIBOR plus an applicable margin ranging from
2.50%
to
3.00%,
(iv) reset the financial covenants, and (v) permitted the pay down of the Term A Loan Facility by up to
$10,000.
  The TCW Amendment
No.
3,
among other things, (i) provided for a
$20,000
increase in the total amount available for borrowings under the PNC Facility, (ii) provided for the pay down of the Term A Loan Facility by up to
$10,000,
(iii) provided that the interest rate for borrowings under the Financing Agreement was reset to LIBOR plus an applicable margin of
8.75%
through
June 30, 2020,
and borrowings under the Financing Agreement will thereafter bear interest at LIBOR plus an applicable margin ranging from
7.25%
to
8.75%,
(iv) deleted the senior leverage ratio covenant, (v) amended the total leverage ratio covenant, including the definition of total leverage ratio, to increase the maximum total leverage on a quarterly basis beginning with the fiscal quarter ended
September 30, 2019, (
vi) amended the fixed charge coverage ratio covenant to decrease the minimum fixed charge coverage ratio on a quarterly basis beginning with the fiscal quarter ending
September 30, 2020
through the fiscal quarter ending
December 31, 2021
and (vii) reset the call protection on the Term Loan A Facility. 
 
On
September 27, 2019,
the Company and certain of its subsidiaries entered into that certain Amendments
No.
3
to the Amended and Restated Revolving Credit and Security Agreement (the “PNC Amendment
No.
3”
) and that certain Amendment
No.
4.
to the Financing Agreement (the “TCW Amendment
No.
4”
).  The PNC Amendment
No.
3,
among other things, amended the (i) definition of “Consolidated EBITDA” by permitting an addback for restructuring and transition costs and charges incurred on or before
December 31, 2020
in connection with the Company’s previously announced closure of business operations in Dongguan, China, subject to certain exceptions,
not
to exceed (a) with respect to cash restructuring costs,
$2,300,
(b) with respect to write-offs of accounts receivable,
$1,623,
and (c) with respect to write-offs of Inventory (as defined in the Amended and Restated Revolving Credit and Security Agreement),
$1,607,
(ii) definition of “Permitted Intercompany Investments” by permitting certain investments by a Domestic Loan Party (as defined in the Amended and Restated Revolving Credit and Security Agreement) to or in SMTC Electronics Dongguan Company Limited, a limited liability company organized under the laws of China (“SMTC Dongguan”), solely to facilitate the closure of business operations in Dongguan, China, so long as, among other things, (a) such Investments (as defined in the PNC Agreement) are made prior to
March 31, 2020, (
b) the aggregate amount of all such Investments does
not
exceed
$2,300
during the term of the Amended and Restated Revolving Credit and Security Agreement, (c) the Borrowers (as defined in the Amended and Restated Revolving Credit and Security Agreement) maintain certain minimum liquidity requirements and (iii) negative covenant regarding excess cash.  The TCW Amendment
No.
4,
among other things, amended the (i) definition of “Consolidated EBITDA” by permitting an addback for restructuring and transition costs and charges incurred on or before
December 31, 2020
in connection with the closure of business operations in Dongguan, China, subject to certain exceptions,
not
to exceed (a) with respect to cash restructuring costs,
$2,300,
(b) with respect to write-offs of accounts receivable,
$1,623,
and (c) with respect to write-offs of Inventory (as defined in the Financing Agreement),
$1,607,
(ii) definition of “Permitted Intercompany Investments” by permitting certain investments by a Domestic Loan Party (as defined in the Financing Agreement) to or in SMTC Dongguan solely to facilitate the closure of business operations in Dongguan, China, so long as, among other things, (a) such Investments (as defined in the Financing Agreement) are made prior to
March 31, 2020, (
b) the aggregate amount of all such Investments does
not
exceed
$2,300
during the term of the Financing Agreement and (c) the Borrowers (as defined in the Financing Agreement) maintain certain minimum liquidity requirements and (iii) negative covenant regarding excess cash.
 
At
September 29, 2019,
$34,840
(
December 30, 2018 -
$25,020
) was outstanding under the PNC Facility and is classified as a current liability based on the requirement to hold a “lock-box” under the terms of the PNC Facility. As at
September 29, 2019,
the funds available to borrow under the PNC Facility after deducting the current borrowing base conditions was
$21,356
(
December 30, 2018 -
$13,974
). The maximum amount of funds that could be available under the PNC Revolving Credit Facility is
$65,000.
However, availability under the PNC Revolving Credit Facility is subject to certain conditions, including borrowing base conditions based on eligible inventory and accounts receivable, and certain conditions as determined by PNC. The Company is required to use a “lock-box” arrangement for the PNC Facility, whereby remittances from customers are swept daily to reduce the borrowings under this facility.
 
At
September 29, 2019,
$39,376
(
December 30, 2018 -
$50,000
) was outstanding under the TCW Term Loan A Facility and
$Nil
(
December 30, 2018 -
$12,000
) under the TCW Term Loan B Facility. The Term Loan A Facility is reported on the consolidated balance sheet net of deferred financing fees of
$2,413
(
December 30, 2018 -
$2,749
) and a discount on debt of
$1,559
(
December 30, 2018 -
$1,843
) related to the outstanding warrants described below. On
July 3, 2019,
the Company repaid the TCW Term Loan B Facility in full.
 
The Credit Facilities are joint and several obligations of the Company and its subsidiaries that are borrowers under the Credit Facilities and are jointly and severally guaranteed by certain other subsidiaries of the Company. Repayments under the PNC Facility and the Term A Loan Facility are collateralized by the assets of the Company and each of its subsidiaries.
 
 
(b) Covenants
 
The Credit Facilities contain certain financial and non-financial covenants. The financial covenants under each Credit Facility require the Company to maintain a fixed charge coverage ratio and a total leverage ratio quarterly during the term of the Credit Facilities.
 
The Company was in compliance with the covenants included in the Credit Facilities as at
September 29, 2019. 
Management projects compliance with the financial covenants included in the Credit Facilities, however note that there are key assumptions included in these cash flow projections to support covenant calculations specifically related to earnings before interest, income taxes and depreciation, as well as anticipated debt levels.  The estimate of cash flows are sensitive to these key assumptions, for instance, when considering our anticipated earnings before interest, income taxes and depreciation over the next
six
months period, a reduction of approximately
5%
could result in the breach of a covenant relative to its impact on our trailing
twelve
months results used in calculating covenant compliance in our
first
quarter
2020
results.  The Company safeguards against this through taking measures to reduce its inventory, revolving credit facility and term debt balances accordingly in order to comply with lenders covenants.  The Company will continue to monitor operations and results closely and manage debt levels relative to our operational results to ensure compliance with its lenders covenants.
 
 
 
(c) Warrant liability
 
 
     On
November 8, 2018,
504,735
warrants were issued to TCW in connection with the Term Loan A Facility and the Term Loan B Facility and outstanding as at
December 30, 2018. 
These warrants are exercisable on a cashless basis, or for an exercise price of
$0.01.
  The Company initially recorded the value of the warrants as a warrant liability with a corresponding discount on the long-term debt in the amount of
$1,898.
 The fair value has been assessed at
$2.13
per unit or
$1,090
as at
September 29, 2019. 
As a result of the anti-dilution provision contained in the warrants that was triggered in connection with the Rights Offering and the Registered Direct Offering, the warrants were exercisable to purchase
511,949
shares of common stock at
September 29, 2019. 
The fair value of the warrant obligation is presented as a warrant liability on the consolidated balance sheet with changes to the fair value recorded each reporting period as either a gain or a loss in the consolidated statement of operations and comprehensive income (loss).