IHOP 2009 Annual Report Download - page 79

for six months if we are in compliance with applicable covenant ratios at that time. The interest rate on
this debt will increase by 0.50%, and any unpaid amount will accrue interest at such increased rate.
Similarly, if we are unable to refinance the IHOP March 2007 securitization debt by March 2012,
we will have the ability to extend the scheduled repayment date for up to two years with a 0.25%
annual increase in the interest rate each year. However, if the IHOP November 2007 securitization
debt goes into rapid amortization, the IHOP March 2007 securitization debt will go into rapid
amortization as well.
We intend to refinance all of the Applebee’s and IHOP indebtedness prior to the expiration of
such extension periods that are available. We may also seek to renegotiate the terms applicable to the
repayment of principal under the relevant securitization program, raise capital or otherwise explore
alternative measures to repay the securitization debt. In the event that we are unable to refinance the
Applebee’s or IHOP securitization debt upon the expiration of the relevant extension periods, a Rapid
Amortization Event (see ‘‘Debt Covenant Compliance’’ below) will occur under the applicable
securitization program and all excess cash flow (after all required payments have been made) will be
deposited in the principal payment account for that program and used to repay principal of the
applicable securitization debt.
Currently, there is no specific plan to prepay any of the securitization debt prior to
December 2012. However, we are constantly reviewing all available options to efficiently manage our
debt portfolio in light of the general economic climate and market conditions. In the event a significant
portion of the securitization debt is repaid prior to December 2012, we may be liable for certain
make-whole prepayment penalties with respect to the securitization debt and the applicable insurance
policies. The amount of any prepayment penalty with respect to the securitization debt would be
determined based upon, among other things, the date of repayment, prevailing benchmark interest rates
at the time of repayment and the percentage of debt repaid. Although generally speaking the amount
of penalty will decline to zero in December 2012, the decline is not necessarily linear over time due to
specific provisions under the indenture under which the debt was issued and the variability of interest
rates. Detailed calculations of prepayment penalties are contained in the applicable series supplements
filed as Exhibits 4.6 and 4.7 to our Form 10-Q filed on May 9, 2007 and Exhibits 4.20 and 4.22 to our
Form 10-K filed on February 28, 2008. The prepayment penalty does not apply to open-market
repurchases of the debt.
Debt Covenant Compliance
As part of the financing for the Applebee’s acquisition, certain subsidiaries of the Company
completed two separate securitization transactions. The securitization transactions consisted of an
issuance of debt collateralized by Applebee’s restaurant assets (the ‘‘Applebee’s Notes’’) and a separate
issuance of debt collateralized by IHOP restaurant assets (the ‘‘IHOP Notes’’). Previously, IHOP
completed a $200 million securitization in March 2007, which is subject to the same debt covenants as
IHOP’s November 2007 securitization. This securitized debt is subject to a series of covenants and
restrictions which are customary for transactions of this type. As of December 31, 2009, approximately
$1.7 billion of securitized debt is subject to these covenants and restrictions.
The most significant covenants related to the securitized debt require the maintenance of a
consolidated leverage ratio and certain debt service coverage ratios. The consolidated leverage ratio is
defined as (a) the sum of: (i) all securitized debt (assuming all variable funding facilities are fully
drawn); (ii) all other debt of the Company; and (iii) current monthly operating lease expense multiplied
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