Business Context and Reporting Period
Company: Optical Cable Corporation
Filing Type: Form 8-K (Current Report)
Date of Report: April 26, 2016
Event: Entry into a Material Definitive Agreement and Termination of prior Material Definitive Agreements.
On April 26, 2016, the Company entered into a new Credit Agreement with Bank of North Carolina (BNC) to refinance existing indebtedness held by SunTrust Bank and BNC (successor to Valley Bank). This transaction consolidated the Company's debt structure into a new revolving credit facility and two term loans.
Key Financial Metrics and Debt Structure
The filing details the following new debt instruments and financial obligations:
- Revolving Credit Facility: Maximum principal amount of $7,000,000.
- Interest Rate: Adjusted LIBOR + 3.65%.
- Terms: Interest-only monthly payments; principal due at maturity (February 28, 2018).
- Step-downs: Reduces to $6,500,000 on Feb 28, 2017, and $6,000,000 on Feb 28, 2018.
- Term Loan A: Principal amount of $1,816,609.03.
- Interest Rate: 4.25% per annum.
- Payments: $12,533.02 monthly starting May 1, 2016.
- Maturity: April 30, 2018.
- Term Loan B: Principal amount of $5,271,410.83.
- Interest Rate: 4.25% per annum.
- Payments: $36,426.17 monthly starting May 1, 2016.
- Maturity: April 30, 2018.
- Transaction Costs: $70,000 fee for the Revolving Loan and $26,451.00 in closing fees/costs.
- Net Borrowing: The Company borrowed $6,013,797.33 to pay off outstanding SunTrust loans.
Material Changes Versus Prior Period
The Company terminated 19 prior agreements, including credit agreements, term loan notes, and modification agreements with SunTrust Bank and Valley Bank (now BNC). Key changes include:
- Lender Consolidation: All debt is now held by Bank of North Carolina, replacing SunTrust Bank and the legacy Valley Bank structure.
- Debt Restructuring: The previous $17,000,000 credit facility (comprising a $6M revolver, $2.24M Term A, $6.5M Term B, and $2.26M Capital Acquisition loan) was restated into the new $7M revolver and two new term notes totaling approximately $7.09M.
- Collateral: The new agreement secures a perfected first lien on all Company assets and cross-collateralizes real property in Roanoke, VA, and Swannanoa, NC.
Financial Covenants and Risks
The Company must maintain specific financial covenants under the new Credit Agreement:
- Fixed Charge Coverage Ratio: Minimum 1.10:1.00 for the fiscal year ending October 31, 2016, stepping up to 1.50:1.00 thereafter.
- Debt to Worth: Total Liabilities to Tangible Net Worth ratio must not exceed 0.95:1 (monitored quarterly).
- Current Ratio: Must maintain a ratio of not less than 3.00:1.0 (monitored quarterly).
- Deposit Requirement: The Company must maintain its primary depository accounts with the Lender.
Risks: Failure to meet these covenants could result in a default. The filing does not provide current revenue, profit, or cash flow figures, only the required ratios for compliance.
Investor Verification Checklist
- Verify the Company's ability to meet the strict 3.00:1.0 Current Ratio covenant starting with the quarter ending April 30, 2016.
- Confirm the Company's Adjusted EBITDA to ensure compliance with the Fixed Charge Coverage Ratio (1.10:1.00 for FY 2016).
- Review the impact of the new interest-only revolver structure on future cash flow requirements versus the previous amortizing loans.
- Assess the implications of the "step-down" feature on the revolver, which reduces available liquidity from $7M to $6M by 2018.
- Check for any subsequent filings regarding the Company's actual financial performance for the quarter ended April 30, 2016, to validate covenant compliance.