Business Context and Reporting Period
This Form 8-K Current Report was filed by RH on July 7, 2017. The filing discloses the entry into a material definitive agreement involving a new credit facility by Restoration Hardware, Inc., a wholly-owned subsidiary of RH.
Key Financial Metrics and Debt Structure
- New Debt Instrument: Second Lien Term Loan with an aggregate principal amount of $100,000,000.
- Maturity Date: January 7, 2023.
- Interest Rate: Floating rate based on one-month LIBOR plus 8.25%.
- Collateral: Secured by a second lien security interest in inventory, receivables, and certain intellectual property, ranking junior to the existing ABL First Lien Credit Agreement.
- Prepayment Terms: Permitted in whole or in part subject to a 3.0% prepayment premium.
Material Changes and Covenants
The filing introduces new financial covenants not present in the prior ABL First Lien Credit Agreement:
- Senior Secured Leverage Ratio: Defined as consolidated secured debt less unrestricted cash divided by consolidated EBITDA. The ratio must not exceed 5.00:1.00 at any time. New indebtedness is restricted if it would cause the ratio to exceed 4.00:1.00.
- Fixed Charge Coverage Ratio (FCCR): Based on consolidated EBITDA to debt service costs. Restricted payments are prohibited if the ratio falls below 1.00:1.00 and unused availability under the ABL facility drops below certain levels.
- Intercreditor Agreement: Established priority of liens and customary terms between the First Lien Administrative Agent (Bank of America, N.A.) and the Second Lien Administrative Agent (Wilmington Trust, National Association).
Guidance, Risks, and Unusual Items
The filing contains forward-looking statements regarding the cost of capital, interest rates, and the company's ability to maintain compliance with the new covenants. Key risks include:
- General business performance affecting the ability to meet leverage and coverage ratios.
- Potential curtailment of availability under the revolving line of credit due to loan term restrictions or collateral amounts.
- Restrictions on dividends, distributions, and additional indebtedness imposed by the new agreement.
Note: This filing does not provide specific revenue, profit, cash flow, or liquidity figures for the reporting period.
Investor Verification Checklist
- Verify the current consolidated EBITDA and unrestricted cash levels to assess compliance with the 5.00:1.00 Senior Secured Leverage Ratio.
- Review the unused availability under the existing ABL First Lien Credit Agreement to determine exposure to the FCCR Covenant restrictions.
- Confirm the impact of the 8.25% LIBOR spread on future interest expense projections.
- Examine the specific definitions of "restricted payments" to understand limitations on capital returns to shareholders.