Cincinnati Bell 2006 Annual Report Download - page 184

The Corporate credit facility financial covenants require that the Company maintain certain leverage,
interest coverage and fixed charge ratios. The facilities also contain certain covenants which, among other things,
restrict the Company’s ability to incur additional debt or liens, pay dividends, repurchase Company common
stock, sell, transfer, lease, or dispose of assets and make investments or merge with another company. If the
Company were to violate any of its covenants and was unable to obtain a waiver, it would be considered a
default. If the Company were in default under the Corporate credit facility, no additional borrowings under this
facility would be available until the default was waived or cured. The Company’s ability to borrow was not
compromised as a result of any such default as of the date of this filing. The credit facilities provide for
customary events of default, including a cross-default provision for failure to make any payment when due or
permitted acceleration due to a default, both in respect to any other existing debt instrument having an aggregate
principal amount that exceeds $35 million.
16% Senior Subordinated Discount Notes due 2009
On March 26, 2003, the Company received $350 million of gross cash proceeds from the issuance of the
16% Notes. Proceeds from the 16% Notes, net of fees, were used to pay down borrowings under the Company’s
credit facilities. On August 31, 2005, the Company retired the 16% Notes for $447.8 million, including $7.7
million of accrued interest, using the proceeds from the Tranche B Term Loan and additional borrowings under
the Corporate credit facility. The retirement resulted in a loss on debt extinguishment of $91.9 million. Interest
on the 16% Notes was payable semi-annually on June 30 and December 31 of each year outstanding, whereby
12% was paid in cash and 4% was accreted on the aggregate principal amount. In addition, purchasers of the 16%
Notes received 17.5 million common stock warrants, subject to anti-dilution provisions, each to purchase one
share of Cincinnati Bell common stock at $3.00 each, which expire in March 2013. Of the total gross proceeds
received, $47.5 million was allocated to the fair value of the warrants using the Black-Scholes option-pricing
model and was recorded as a discount on the 16% Notes. Substantially all of these warrants remain outstanding at
December 31, 2006.
The Company incurred $30.2 million and $43.7 million of cash interest expense related to the 16% Notes in
2005 and 2004, respectively. The Company recognized $10.1 million and $14.6 million in 2005 and 2004,
respectively, of non-cash interest expense related to the 4% principal accretion. The Company recognized $5.4
million and $8.2 million in 2005 and 2004, respectively, of non-cash interest expense related to the amortization
of the discount.
7
1
⁄ 4 % Senior Notes due 2013
On July 11, 2003, the Company issued $500.0 million of 7
1
⁄ 4 % Notes due 2013. Net proceeds totaled
$488.8 million and were used to prepay term credit facilities and permanently reduce commitments under the
Company’s revolving credit facility. Interest on the 7
1
⁄ 4 % Notes due 2013 is payable in cash semi-annually in
arrears on January 15 and July 15 of each year, commencing on January 15, 2004. The 7
1
⁄ 4 % Notes due 2013 are
unsecured senior obligations and rank equally with all of the Company’s existing and future senior debt and rank
senior to all existing and future subordinated debt. The indenture governing the 7
1
⁄ 4 % Notes due 2013 contains
covenants including but not limited to the following: limitations on dividends to shareowners and other restricted
payments; dividend and other payment restrictions affecting the Company’s subsidiaries such that the
subsidiaries are not permitted to enter into an agreement that would limit their ability to make dividend payments
to the parent; issuance of indebtedness; asset dispositions; transactions with affiliates; liens; investments;
issuances and sales of capital stock of subsidiaries; and redemption of debt that is junior in right of payment. The
indenture governing 7
1
⁄ 4 % Notes due 2013 provides for customary events of default, including a cross-default
provision for failure for both non-payment at final maturity or acceleration due to a default of any other existing
debt instrument that exceeds $20 million. The Company may redeem the 7
1
⁄ 4 % Notes due 2013 for a redemption
price of 103.625%, 102.417%, 101.208%, and 100.000% after July 15, 2008, 2009, 2010, and 2011, respectively.
The Company recorded interest expense of $36.2 million in 2006, 2005 and 2004 related to these senior notes.
Certain terms and conditions pertaining to these notes were altered as a result of a consent process
undertaken as part of the first stage of the Company’s 2005 refinancing plan. In January 2005, the indenture
governing the 7
1
⁄ 4 % Notes due 2013 (the “7
1
⁄ 4 % Indenture”) was amended to permit the Company to repurchase
or redeem the 16% Notes without regard to the extent of the Company’s ability to make restricted payments as
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