Quarterly report pursuant to Section 13 or 15(d)

Long-Term Debt

v2.4.0.6
Long-Term Debt
3 Months Ended
Mar. 31, 2012
Long-Term Debt [Abstract]  
Long-Term Debt

6. Long-Term Debt

Long-term debt consists of the following:

 

                 
    March 31,
2012
    December 31,
2011
 
    (In thousands)  

2011 Revolving Credit Facility (1)

  $ —       $ —    

9.0% Senior Subordinated Notes due 2018 (the “9.0% Notes”)

    210,000        210,000   

5.0% Convertible Senior Notes due 2029, redeemable in 2014 (the “5.0% Convertible Notes”) (2)

    155,055        155,055   

Notes payable to a finance company bearing interest from 9.52% to 10.52% (with a weighted average of 10.19%)

    12,584        13,223   

Mortgage notes to finance companies-fixed rate, bearing interest from 4.29% to 7.03%

    126,283        116,584   

Mortgage notes to finance companies-variable rate, bearing interest at 1.25 to 3.50 percentage points above one-month LIBOR

    64,785        65,640   

Net debt discount and premium (3)

    (17,298)       (18,635)  

Other

    5,671        5,752   
   

 

 

   

 

 

 

Total debt

  $ 557,080      $ 547,619   

Less current maturities

    (12,052)       (11,608)  
   

 

 

   

 

 

 

Long-term debt

  $ 545,028      $ 536,011   
   

 

 

   

 

 

 

 

(1)

The interest rate on the revolving credit facility was 2.25% above LIBOR at both March 31, 2012 and December 31, 2011.

 

(2)

See the heading “5.0% Senior Convertible Notes” below for discussion of the terms under which these notes may be redeemed in 2014.

 

(3)

March 31, 2012 includes $1.2 million discount associated with the 9.0% Notes, $16.3 million discount associated with the 5.0% Convertible Notes, $1.1 million premium associated with notes payable to a finance company and $0.9 million discount associated with mortgage notes payable. December 31, 2011 includes $1.2 million discount associated with the 9.0% Notes, $17.7 million discount associated with the 5.0% Convertible Notes, $1.2 million premium associated with notes payable to a finance company and $0.9 million discount associated with mortgage notes payable.

2011 Credit Facilities

Sonic has a syndicated revolving credit agreement (the “2011 Revolving Credit Facility”) and a syndicated floor plan credit facility (the “2011 Floor Plan Facility”). The 2011 Revolving Credit Facility and 2011 Floor Plan Facility (collectively the “2011 Credit Facilities”) are scheduled to mature on August 15, 2016.

Availability under the 2011 Revolving Credit Facility is calculated as the lesser of $175.0 million or a borrowing base calculated based on certain eligible assets plus 50% of the fair market value of 5,000,000 shares of common stock of Speedway Motorsports, Inc. (“SMI”) that are pledged as collateral, less the aggregate face amount of any outstanding letters of credit under the 2011 Revolving Credit Facility (the “2011 Revolving Borrowing Base”). The 2011 Revolving Credit Facility may be increased at Sonic’s option to $225.0 million upon satisfaction of certain conditions. A withdrawal of the pledge of SMI common stock by Sonic Financial Corporation (“SFC”), which holds the 5,000,000 shares of common stock of SMI, or a decline in the value of SMI common stock, could reduce the amount Sonic can borrow under the 2011 Revolving Credit Facility.

 

Based on balances as of March 31, 2012, the 2011 Revolving Borrowing Base was approximately $168.9 million and Sonic had approximately $39.2 million in outstanding letters of credit resulting in total borrowing availability of approximately $129.7 million under the 2011 Revolving Credit Facility.

Outstanding obligations under the 2011 Revolving Credit Facility are secured by a pledge of substantially all of the assets of Sonic and its subsidiaries and by the pledge of 5,000,000 shares of common stock of SMI by SFC. The collateral also includes a pledge of the franchise and dealer agreements and stock or equity interests of Sonic’s dealership subsidiaries, except for those dealership subsidiaries where the applicable manufacturer prohibits such a pledge, in which cases the stock or equity interests of the dealership subsidiary is subject to an escrow arrangement with the administrative agent. Substantially all of Sonic’s subsidiaries also guarantee its obligations under the 2011 Revolving Credit Facility.

The maturity date of the 2011 Revolving Credit Facility may in certain circumstances be accelerated (the “Springing Maturity Date”) if the share price of Sonic’s common stock falls below a certain level or if Sonic does not maintain certain liquidity levels during enumerated periods of time prior to the maturity date (including dates upon which Sonic may be compelled to repurchase such indebtedness) of certain indenture indebtedness or other indebtedness with an outstanding balance in excess of $35.0 million. In addition, availability of the 2011 Revolving Credit Facility may be curtailed during enumerated periods related to any Springing Maturity Date. Based on Sonic’s current outstanding debt obligations, the earliest possible occurrence of such a Springing Maturity Date would be July 1, 2014.

The 2011 Floor Plan Facility is comprised of a new vehicle revolving floor plan facility in an amount up to $500.0 million (the “2011 New Vehicle Floor Plan Facility”) and a used vehicle revolving floor plan facility in an amount up to $80.0 million, subject to a borrowing base (the “2011 Used Vehicle Floor Plan Facility”). Sonic may, under certain conditions, request an increase in the 2011 Floor Plan Facility of up to $175.0 million, which shall be allocated between the 2011 New Vehicle Floor Plan Facility and the 2011 Used Vehicle Floor Plan Facility as Sonic requests, with no more than 15% of the aggregate commitments allocated to the commitments under the 2011 Used Vehicle Floor Plan Facility. Outstanding obligations under the 2011 Floor Plan Facility are guaranteed by Sonic and certain of its subsidiaries and are secured by a pledge of substantially all of the assets of Sonic and its subsidiaries. The amounts outstanding under the 2011 Credit Facilities bear interest at variable rates based on specified percentages above LIBOR.

Sonic agreed under the 2011 Credit Facilities not to pledge any assets to any third party, subject to certain stated exceptions, including floor plan financing arrangements. In addition, the 2011 Credit Facilities contain certain negative covenants, including covenants which could restrict or prohibit indebtedness, liens, the payment of dividends, capital expenditures and material dispositions and acquisitions of assets as well as other customary covenants and default provisions. Specifically, the 2011 Credit Facilities permit cash dividends on Sonic’s Class A and Class B common stock so long as no event of default (as defined in the 2011 Credit Facilities) has occurred and is continuing and provided that Sonic remains in compliance with all financial covenants under the 2011 Credit Facilities.

Covenants

Sonic was in compliance with the covenants under the 2011 Credit Facilities as of March 31, 2012 and expects to be in compliance with all such covenants for the foreseeable future. On April 19, 2012, Sonic entered into an amendment to the 2011 Credit Facilities to reduce the required Consolidated Liquidity Ratio covenant to a minimum ratio of 1.05 to 1.00 from a minimum ratio of 1.10 to 1.00. The Consolidated Liquidity Ratio requirement for the 2011 Credit Facilities had been a minimum ratio of 1.05 to 1.00, with a scheduled escalation to 1.10 to 1.00 effective March 31, 2012. This amendment to the 2011 Credit Facilities maintains the Consolidated Liquidity Ratio requirement at a minimum ratio of 1.05 to 1.00 for the remainder of the term of the 2011 Credit Facilities, effective as of March 31, 2012. Financial covenants include required specified ratios (as each is defined in the 2011 Credit Facilities) of:

 

                         
    Covenant  
    Consolidated
Liquidity
Ratio
    Consolidated
Fixed Charge
Coverage
Ratio
    Consolidated
Total Lease
Adjusted Leverage
Ratio
 

Required ratio

    ³ 1.05       ³ 1.20       £ 5.50  

March 31, 2012 actual

    1.16       1.64       3.95  

 

The 2011 Credit Facilities contain events of default, including cross-defaults to other material indebtedness, change of control events and events of default customary for syndicated commercial credit facilities. Upon the future occurrence of an event of default, Sonic could be required to immediately repay all outstanding amounts under the 2011 Credit Facilities.

In addition, many of Sonic’s facility leases are governed by a guarantee agreement between the landlord and Sonic that contains financial and operating covenants. The financial covenants are identical to those under the 2011 Credit Facilities with the exception of one financial covenant related to the ratio of EBTDAR to Rent (as defined in the lease agreements) with a required ratio of no less than 1.5 to 1.0. At March 31, 2012, the ratio was 2.9 to 1.0.

9.0% Senior Subordinated Notes

The 9.0% Notes are unsecured senior subordinated obligations of Sonic that mature on March 15, 2018 and are guaranteed by Sonic’s domestic operating subsidiaries. Interest is payable semi-annually on March 15 and September 15 each year. Sonic may redeem the 9.0% Notes in whole or in part at any time after March 15, 2014 at the following redemption prices, which are expressed as percentages of the principal amount:

 

         
    Redemption  

Beginning on March 15, 2014

    104.50%  

Beginning on March 15, 2015

    102.25%  

Beginning on March 15, 2016 and thereafter

    100.00%  

In addition, on or before March 15, 2013, Sonic may redeem up to 35% of the aggregate principal amount of the 9.0% Notes at par value plus accrued interest with proceeds from certain equity offerings. The Indenture also provides that holders of 9.0% Notes may require Sonic to repurchase the 9.0% Notes at 101% of the par value of the 9.0% Notes, plus accrued interest if Sonic undergoes a “change of control” as defined in the Indenture.

The Indenture governing the 9.0% Notes contains certain specified restrictive covenants. Sonic has agreed not to pledge any assets to any third party lender of senior subordinated debt except under certain limited circumstances. Sonic also has agreed to certain other limitations or prohibitions concerning the incurrence of other indebtedness, capital stock, guarantees, asset sales, investments, cash dividends to stockholders, distributions and redemptions. Specifically, the indenture governing Sonic’s 9.0% Notes limits Sonic’s ability to pay quarterly cash dividends on Sonic’s Class A and B common stock in excess of $0.10 per share. Sonic may only pay quarterly cash dividends on Sonic’s Class A and B common stock if Sonic complies with the terms of the indenture governing the 9.0% Notes. Sonic was in compliance with all restrictive covenants as of March 31, 2012.

Balances outstanding under Sonic’s 9.0% Notes are guaranteed by all of Sonic’s operating domestic subsidiaries. These guarantees are full and unconditional and joint and several. The parent company has no independent assets or operations. The non-domestic and non-operating subsidiaries that are not guarantors are considered to be minor.

Sonic’s obligations under the 9.0% Notes may be accelerated by the holders of 25% of the outstanding principal amount of the 9.0% Notes then outstanding if certain events of default occur, including: (1) defaults in the payment of principal or interest when due; (2) defaults in the performance, or breach, of Sonic’s covenants under the 9.0% Notes; and (3) certain defaults under other agreements under which Sonic or its subsidiaries have outstanding indebtedness in excess of $35.0 million.

5.0% Convertible Senior Notes

The 5.0% Convertible Notes bear interest at a rate of 5.0% per year, payable semiannually on April 1 and October 1 of each year. The 5.0% Convertible Notes mature on October 1, 2029. Sonic may redeem some or all of the 5.0% Convertible Notes for cash at any time subsequent to October 1, 2014 at a repurchase price equal to 100% of the outstanding principal amount of the notes. Upon the issuance of a redemption notice by Sonic, the holders may convert the 5.0% Convertible Notes prior to the redemption date at their option. Holders have the right to require Sonic to purchase the 5.0% Convertible Notes on each of October 1, 2014, October 1, 2019 and October 1, 2024 or in the event of a change in control for cash at a purchase price equal to 100% of the outstanding principal amount of the notes.

 

Holders of the 5.0% Convertible Notes may convert their notes at their option prior to the close of business on the business day immediately preceding July 1, 2029 only under the following circumstances: (1) during any fiscal quarter commencing after December 31, 2009, if the last reported sale price of the Class A common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each applicable trading day; (2) during the five business day period after any 10 consecutive trading day period (the “Measurement Period”) in which the trading price (as defined below) per $1,000 principal amount of notes for each day of that Measurement Period was less than 98% of the product of the last reported sale price of Sonic’s Class A common stock and the applicable conversion rate on each such day; (3) if Sonic calls any or all of the notes for redemption, at any time prior to the close of business on the third scheduled trading day prior to the redemption date; or (4) upon the occurrence of specified corporate events. On and after July 1, 2029, to (and including) the close of business on the third scheduled trading day immediately preceding the maturity date, holders may convert their notes at any time, regardless of the foregoing circumstances. As of March 31, 2012, the conversion rate was 75.3017 shares of Class A common stock per $1,000 principal amount of notes, which is equivalent to a conversion price of approximately $13.28 per share of Class A common stock. The conversion rate may be adjusted in the future as a result of any future declaration of dividends on Sonic’s Class A common stock. The 5.0% Convertible Notes were not convertible at any time during the first quarter ended March 31, 2012. However, during the last 30 consecutive trading days prior to March 31, 2012, the last reported sale price of Sonic’s Class A common stock for 24 trading days within that 30 day period was in excess of 130% of the applicable conversion price of $13.28 per share. As a result, the 5.0% Convertible Notes are convertible at the option of the holder beginning April 1, 2012 until June 30, 2012, which is the next measurement date. If the holders choose to exercise their conversion option on the 5.0% Convertible Notes, Sonic will be required to settle the converted notes through Sonic’s choice of cash, the issuance of shares of Sonic’s Class A common stock or a combination of cash and common stock.

To recognize the equity component of a convertible borrowing instrument, upon issuance of the 5.0% Convertible Notes in September 2009, Sonic recorded a debt discount of approximately $31.0 million and a corresponding amount (net of taxes of approximately $12.8 million) to equity, based on an estimated non-convertible borrowing rate of 10.5%. The debt discount is being amortized to interest expense through October 2014, the earliest redemption date. The unamortized debt discount was approximately $16.3 million and $17.7 million at March 31, 2012 and December 31, 2011, respectively.

Sonic incurred interest expense related to the 5.0% Convertible Notes of approximately $2.0 million and $2.2 million for the first quarters ended March 31, 2012 and 2011, respectively, recorded to interest expense, other, net, in the accompanying Unaudited Condensed Consolidated Statements of Income. In addition, Sonic recorded interest expense associated with the amortization of debt discount and deferred loan costs on the 5.0% Convertible Notes of approximately $1.6 million and $1.7 million for the first quarters ended March 31, 2012 and 2011, respectively, recorded to interest expense, non-cash, convertible debt in the accompanying Unaudited Condensed Consolidated Statements of Income.

Mortgage Notes

Sonic has mortgage financing totaling approximately $191.1 million in aggregate, related to 20 of its dealership properties. These mortgage notes require monthly payments of principal and interest through maturity and are secured by the underlying properties. Maturity dates range between June 2013 and March 2031. The weighted average interest rate was 4.66% at March 31, 2012.

 

Derivative Instruments and Hedging Activities

At March 31, 2012 Sonic had interest rate cash flow swap agreements to effectively convert a portion of its LIBOR-based variable rate debt to a fixed rate. The fair value of these swap positions at March 31, 2012 was a liability of approximately $34.8 million, with $12.7 million included in other accrued liabilities and $22.1 million included in other long-term liabilities in the accompanying Unaudited Condensed Consolidated Balance Sheets. Under the terms of these cash flow swaps, Sonic will receive and pay interest based on the following:

 

                 

Notional

Amount

 

Pay Rate

 

Receive Rate (1)

 

Maturing Date

(In millions)

           

$

 

200.0         

  4.935%   one-month LIBOR   May 1, 2012

$

 

100.0         

  5.265%   one-month LIBOR   June 1, 2012

$

 

3.3         

  7.100%   one-month LIBOR + 1.50%   July 10, 2017

$

 

25.0    (2)

  5.160%   one-month LIBOR   September 1, 2012

$

 

15.0    (2)

  4.965%   one-month LIBOR   September 1, 2012

$

 

25.0    (2)

  4.885%   one-month LIBOR   October 1, 2012

$

 

10.5         

  4.655%   one-month LIBOR   December 10, 2017

$

 

  8.4    (2)

  6.860%   one-month LIBOR + 1.25%   August 1, 2017

$

 

6.5         

  4.330%   one-month LIBOR   July 1, 2013

$

 

100.0    (3)

  3.280%   one-month LIBOR   July 1, 2015

$

 

100.0    (3)

  3.300%   one-month LIBOR   July 1, 2015

$

 

7.0    (2)

  6.410%   one-month LIBOR + 1.25%   September 12, 2017

$

 

50.0    (3)

  2.767%   one-month LIBOR   July 1, 2014

$

 

50.0    (3)

  3.240%   one-month LIBOR   July 1, 2015

$

 

50.0    (3)

  2.610%   one-month LIBOR   July 1, 2014

$

 

50.0    (3)

  3.070%   one-month LIBOR   July 1, 2015

$

 

100.0    (4)

  2.065%   one-month LIBOR   June 30, 2017

$

 

100.0    (4)

  2.015%   one-month LIBOR   June 30, 2017

 

  (1) The one-month LIBOR rate was 0.241% at March 31, 2012.
  (2) Changes in fair value are recorded through earnings.
  (3) The effective date of these forward-starting swaps is July 2, 2012.
  (4) The effective date of these forward-starting swaps is July 1, 2015.

During the first quarter ended March 31, 2012, Sonic entered into two $100.0 million notional forward-starting interest rate cash flow swap agreements that become effective in July 2015 and terminate in June 2017. These interest rate swaps have been designated and qualify as cash flow hedges and, as a result, changes in the fair value of these swaps are recorded in other comprehensive income (loss), net of related income taxes, in the accompanying Unaudited Condensed Consolidated Statements of Comprehensive Income.

For the cash flow swaps not designated as hedges (changes in the fair value are recognized through earnings) and amortization of amounts in accumulated other comprehensive income (loss) related to terminated cash flow swaps, certain benefits and charges were included in interest income (expense/amortization), non-cash, cash flow swaps, in the accompanying Unaudited Condensed Consolidated Statements of Income.

For the cash flow swaps that qualify as cash flow hedges, the changes in the fair value of these swaps have been recorded in other comprehensive income (loss), net of related income taxes, in the accompanying Unaudited Condensed Consolidated Statements of Comprehensive Income. The incremental interest expense (the difference between interest paid and interest received) related to these cash flow swaps was approximately $4.4 million for each of the first quarters ended March 31, 2012 and 2011, and is included in interest expense, other, net, in the accompanying Unaudited Condensed Consolidated Statements of Income. The estimated net expense expected to be reclassified out of accumulated other comprehensive income (loss) into results of operations during the next twelve months is approximately $7.5 million.