6. Long-Term Debt

Long-term debt consists of the following:

 

(In thousands)		September 30, 2013				December 31, 2012
2011 Revolving Credit Facility (1)		$	—			$	6,176
9.0% Senior Subordinated Notes due 2018 (the “9.0% Notes”)			—				210,000
7.0% Senior Subordinated Notes due 2022 (the “7.0% Notes”)			200,000				200,000
5.0% Senior Subordinated Notes due 2023 (the “5.0% Notes”)			300,000				—
Notes payable to a finance company bearing interest from 9.52% to 10.52% (with a weighted average of 10.19%)			8,394				10,572
Mortgage notes to finance companies-fixed rate, bearing interest from 3.51% to 7.03%			159,336				137,791
Mortgage notes to finance companies-variable rate, bearing interest at 1.25 to 3.50 percentage points above one-month LIBOR			81,004				62,229
Net debt discount and premium (2)			(1,827	)			(2,814	)
Other			5,167				5,431
Total debt		$	752,074			$	629,385
Less current maturities			(18,010	)			(18,587	)
Long-term debt		$	734,064			$	610,798

 

(1)	The interest rate on the revolving credit facility was 2.25% above LIBOR at September 30, 2013 and 2.25% above LIBOR at December 31, 2012.

(2)

September 30, 2013 includes $1.6 million discount associated with the 7.0% Notes, $0.4 million premium associated with notes payable to a finance company and $0.6 million discount associated with mortgage notes payable. December 31, 2012 includes $1.1 million discount associated with the 9.0% Notes, $1.7 million discount associated with the 7.0% Notes, $0.7 million premium associated with notes payable to a finance company and $0.7 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 Facilities”). The 2011 Revolving Credit Facility and 2011 Floor Plan Facilities (collectively the “2011 Credit Facilities”) are scheduled to mature on August 15, 2016. On March 14, 2013, Sonic finalized an amendment to its 2011 Credit Facilities that, among other things, removed the pledge of 5,000,000 shares of common stock of Speedway Motorsports, Inc. (“SMI”) that were previously pledged as collateral to the 2011 Credit Facilities.

 

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, 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.

Based on balances as of September 30, 2013, the 2011 Revolving Borrowing Base was approximately $141.7 million and Sonic had approximately $32.3 million in outstanding letters of credit resulting in total borrowing availability of approximately $109.4 million under the 2011 Revolving Credit Facility.

The 2011 Floor Plan Facilities are comprised of a new vehicle revolving floor plan facility (the “2011 New Vehicle Floor Plan Facility”) and a used vehicle revolving floor plan facility (the “2011 Used Vehicle Floor Plan Facility”). On July 31, 2013, Sonic finalized an amendment to its 2011 Floor Plan Facilities that, among other things, increased the borrowing availability under the 2011 New Vehicle Floor Plan Facility from $500.0 million to $525.0 million. This increase was effective prospectively and did not impact the $80.0 million borrowing limit under the 2011 Used Vehicle Floor Plan Facility.

Covenants

Sonic was in compliance with the covenants under the 2011 Credit Facilities as of September 30, 2013. Financial covenants include required specified ratios (as each is defined in the 2011 Credit Facilities) of:

 

		Covenant
		Minimum Consolidated Liquidity Ratio				Minimum Consolidated Fixed Charge Coverage Ratio				Maximum Consolidated Total Lease Adjusted Leverage Ratio
Required ratio			1.05				1.20				5.50
September 30, 2013 actual			1.16				1.74				4.07

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 1.50 to 1.00. As of September 30, 2013, the ratio was 3.43 to 1.00.

5.0% Senior Subordinated Notes

On May 9, 2013, Sonic issued $300.0 million in aggregate principal amount of 5.0% Senior Subordinated Notes which mature on May 15, 2023. The 5.0% Notes were issued at 100.0% of the principal amount thereof. Sonic used a portion of the net proceeds from the issuance of the 5.0% Notes to repurchase all of its outstanding 9.0% Notes. Remaining proceeds from the issuance of the 5.0% Notes will be used for general corporate purposes. The 5.0% Notes are unsecured senior subordinated obligations of Sonic that mature on May 15, 2023 and are guaranteed by Sonic’s domestic operating subsidiaries. Interest is payable semi-annually in arrears on May 15 and November 15 of each year. Sonic may redeem the 5.0% Notes in whole or in part at any time after May 15, 2018 at the following redemption prices, which are expressed as percentages of the principal amount:

 

		Redemption Price
Beginning on May 15, 2018			102.500	%
Beginning on May 15, 2019			101.667	%
Beginning on May 15, 2020			100.833	%
Beginning on May 15, 2021 and thereafter			100.000	%

 

In addition, on or before May 15, 2016, Sonic may redeem up to 35% of the aggregate principal amount of the 5.0% Notes at 105% of the par value of the 5.0% Notes plus accrued and unpaid interest with proceeds from certain equity offerings. On or before May 15, 2018, Sonic may redeem all or a part of the aggregate principal amount of the 5.0% Notes at a redemption price equal to 100% of the principal amount of the 5.0% Notes redeemed plus an applicable premium (as defined in the Indenture) and any accrued and unpaid interest as of the redemption date. The indenture also provides that holders of the 5.0% Notes may require Sonic to repurchase the 5.0% Notes at 101% of the par value of the 5.0% Notes, plus accrued and unpaid interest, if Sonic undergoes a change of control, as defined in the indenture.

The indenture governing the 5.0% 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, guarantees, liens, certain types of investments, certain transactions with affiliates, mergers, consolidations, issuance of preferred stock, cash dividends to stockholders, distributions, redemptions and the sale, assignment, lease, conveyance or disposal of certain assets. Specifically, the indenture governing Sonic’s 5.0% 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 5.0% Notes. Sonic was in compliance with all restrictive covenants as of September 30, 2013.

Sonic’s obligations under the 5.0% Notes may be accelerated by the holders of 25% of the outstanding principal amount of the 5.0% 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 5.0% Notes; and (3) certain defaults under other agreements under which Sonic or its subsidiaries have outstanding indebtedness in excess of $50.0 million.

7.0% Senior Subordinated Notes

The 7.0% Notes are unsecured senior subordinated obligations of Sonic that mature on July 15, 2022 and are guaranteed by Sonic’s domestic operating subsidiaries. Interest is payable semi-annually in arrears on January 15 and July 15 of each year. Sonic may redeem the 7.0% Notes in whole or in part at any time after July 15, 2017 at the following redemption prices, which are expressed as percentages of the principal amount:

 

		Redemption Price
Beginning on July 15, 2017			103.500	%
Beginning on July 15, 2018			102.333	%
Beginning on July 15, 2019			101.167	%
Beginning on July 15, 2020 and thereafter			100.000	%

In addition, on or before July 15, 2015, Sonic may redeem up to 35% of the aggregate principal amount of the 7.0% Notes at 107% of the par value of the 7.0% Notes plus accrued and unpaid interest with proceeds from certain equity offerings. On or before July 15, 2017, Sonic may redeem all or a part of the aggregate principal amount of the 7.0% Notes at a redemption price equal to 100% of the principal amount of the 7.0% Notes redeemed plus an applicable premium (as defined in the Indenture) and any accrued and unpaid interest as of the redemption date. The indenture also provides that holders of the 7.0% Notes may require Sonic to repurchase the 7.0% Notes at 101% of the par value of the 7.0% Notes, plus accrued and unpaid interest, if Sonic undergoes a change of control, as defined in the indenture.

The indenture governing the 7.0% 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, guarantees, liens, certain types of investments, certain transactions with affiliates, mergers, consolidations, issuance of preferred stock, cash dividends to stockholders, distributions, redemptions and the sale, assignment, lease, conveyance or disposal of certain assets. Specifically, the indenture governing Sonic’s 7.0% 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 7.0% Notes. Sonic was in compliance with all restrictive covenants as of September 30, 2013.

Sonic’s obligations under the 7.0% Notes may be accelerated by the holders of 25% of the outstanding principal amount of the 7.0% 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 7.0% Notes; and (3) certain defaults under other agreements under which Sonic or its subsidiaries have outstanding indebtedness in excess of $35.0 million.

9.0% Senior Subordinated Notes

During the second quarter ended June 30, 2013, Sonic repurchased all of its outstanding 9.0% Notes using net proceeds from the issuance of the 5.0% Notes. Sonic paid approximately $237.2 million in cash, including accrued and unpaid interest, to extinguish the 9.0% Notes and recognized a loss of approximately $28.2 million on the repurchase of the 9.0% Notes, recorded in other income (expense), net, in the accompanying Unaudited Condensed Consolidated Statements of Income. In addition to the loss on debt extinguishment, Sonic incurred a charge of approximately $0.8 million recorded in interest expense, other, net, related to the incremental interest incurred while both the 9.0% Notes and the 5.0% Notes were outstanding.

Mortgage Notes

Sonic has mortgage financing totaling approximately $240.3 million in aggregate, related to 25 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 August 2014 and September 2033. The weighted average interest rate was 4.09% at September 30, 2013.

Derivative Instruments and Hedging Activities

Sonic has interest rate cash flow swap agreements (the “Cash Flow Swaps”) to effectively convert a portion of its LIBOR-based variable rate debt to a fixed rate. The fair value of these swap positions at September 30, 2013 was a net liability of approximately $20.3 million, with $11.6 million included in other accrued liabilities and $11.7 million included in other long-term liabilities, offset partially by an asset of approximately $3.0 million included in other assets in the accompanying Unaudited Condensed Consolidated Balance Sheets. The fair value of these swap positions at December 31, 2012 was a liability of approximately $34.3 million, with $12.1 million included in other accrued liabilities and $22.2 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)
$	3.0				7.100	%		one-month LIBOR + 1.50%		July 10, 2017
$	9.5				4.655	%		one-month LIBOR		December 10, 2017
$	7.9	(2)			6.860	%		one-month LIBOR + 1.25%		August 1, 2017
$	100.0				3.280	%		one-month LIBOR		July 1, 2015
$	100.0				3.300	%		one-month LIBOR		July 1, 2015
$	6.7	(2)			6.410	%		one-month LIBOR + 1.25%		September 12, 2017
$	50.0				2.767	%		one-month LIBOR		July 1, 2014
$	50.0				3.240	%		one-month LIBOR		July 1, 2015
$	50.0				2.610	%		one-month LIBOR		July 1, 2014
$	50.0				3.070	%		one-month LIBOR		July 1, 2015
$	100.0	(3)			2.065	%		one-month LIBOR		June 30, 2017
$	100.0	(3)			2.015	%		one-month LIBOR		June 30, 2017
$	200.0	(3)			0.788	%		one-month LIBOR		July 1, 2016
$	50.0	(4)			1.320	%		one-month LIBOR		July 1, 2017
$	250.0	(5)			1.887	%		one-month LIBOR		June 30, 2018

 

(1)	The one-month LIBOR rate was 0.179% at September 30, 2013.

(2)	Changes in fair value are recorded through earnings.

(3)	The effective date of these forward-starting swaps is July 1, 2015.

(4)	The effective date of this forward-starting swap is July 1, 2016.

(5)	The effective date of this forward-starting swap is July 3, 2017.

During the second quarter ended June 30, 2013, Sonic entered into three forward-starting interest rate cash flow swap agreements with notional amounts of $200.0 million, $50.0 million and $250.0 million. These swap agreements become effective in July 2015, July 2016 and July 2017, respectively, and terminate in July 2016, July 2017 and June 2018, respectively. 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 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 and are disclosed in the supplemental schedule of non-cash financing activities in the accompanying Unaudited Condensed Consolidated Statements of Cash Flows. The incremental interest expense (the difference between interest paid and interest received) related to these Cash Flow Swaps was approximately $3.0 million and $8.8 million in the third quarter and nine-month periods ended September 30, 2013, respectively, and $3.4 million and $10.3 million in the third quarter and nine-month periods ended September 30, 2012, respectively, and is included in interest expense, other, net, in the accompanying Unaudited Condensed Consolidated Statements of Income. The estimated expense (net of tax) expected to be reclassified out of accumulated other comprehensive income (loss) into results of operations during the next twelve months is approximately $7.2 million. See Note 10, “Accumulated Other Comprehensive Income (Loss),” for further discussion of the impact of the Cash Flow Swaps on accumulated other comprehensive income (loss).