Sonic 2006 Annual Report Download - page 29

Interest Rate. Interest on loans under the new senior secured credit facility will be payable at per annum rates
equal to (1) in the case of the revolving credit facility, initially, LIBOR plus 175 basis points and adjusting over time
based upon Sonic's leverage ratio and (2) in the case of the term loan facility, initially, LIBOR plus 200 basis points and
adjusting over time based upon Sonic's credit ratings with Moody's Investors Service Inc. As discussed below, we
expect to refinance this facility with an alternative facility that is expected to bear interest at a lower rate.
Commitment Fees.We will pay a commitment fee on the unused portion of the revolving credit facility, starting
at 0.375% and adjusting over time based upon our leverage ratio.
Conditions to Funding.Our ability to reserve funds from the revolving credit facility is conditioned upon various
customary representations and warranties being true at the time of the borrowing, and upon no event of default
existing or resulting from the receipt of such finds.
Security Interests.We and all of our domestic subsidiaries have granted the lenders under the new senior secured
credit facility valid and perfected first priority (subject to certain exceptions) liens and security interests in (1) all
present and future shares of capital stock (or other ownership profit interests) in each of our present and future
subsidiaries (subject to certain limitations), (2) all present and future property and assets, real and personal and (3) all
proceeds and products of the property and assets described in clauses (1) and (2).
Covenants and Events of Default.The credit agreement governing the new senior secured credit facilities
contains certain affirmative covenants, certain negative covenants, certain financial covenants, certain conditions and
events of default that are customarily required for similar financings. Such negative covenants include limitations on
liens, consolidations and mergers, indebtedness, capital expenditures, asset dispositions, sale-leaseback transactions,
stock repurchases, transactions with affiliates and other restrictions and limitations. Furthermore, the credit agreement
requires us to maintain compliance with certain financial covenants such as a leverage ratio and fixed charge
coverage ratio. Although management does not anticipate an event of default, if such an event occurred, the unpaid
amounts outstanding could become immediately due and payable.
Securitization. We currently intend to refinance the new senior secured credit facilities in the near future through
a securitization of our Franchise and Partner Drive-In royalties and Partner Drive-In rental stream.The securitization is
expected to consist of a six-year term asset-backed securitization and a $100 million variable funding note, and to
involve the transfer of certain Franchise and Partner Drive-In assets to a bankruptcy-remote vehicle.We expect the
interest rate on the securitization will be between 50 and 125 basis points lower than on the new senior secured
credit facilities.The final interest rate will be determined based upon final ratings that are in the process of being
determined. Additional fees related to the securitization are estimated at approximately $20 million and will be
amortized over the life of the related debt. The securitization and the refinancing of the new senior secured credit
facilities are expected to occur by December 31, 2006. If, however, we cannot obtain the securitization on terms
satisfactory to us, we expect the new senior secured credit facilities to remain in place until maturity or until an
alternative refinancing can be arranged.
Forward Starting Swap Agreement.We have entered into a forward starting swap agreement with J.P. Morgan
Chase Bank with a total notional amount of $400 million.The forward starting swap agreement was entered into to
hedge part of our interest rate exposure associated with the securitized financing. We expect to settle the forward
swap agreement upon the initiation of the securitized financing. The settlement of this forward starting swap is
expected to provide us with an effective interest rate based upon a five-year swap rate of 5.16% plus 90 to 110 basis
points for $400 million of the amount financed. The remaining term loan balance is expected to bear interest at the
five-year swap rate at the time the securitization is funded plus 90 to 110 basis points. If the securitization is not
completed for any reason, we may redesignate the forward starting swap as a hedge of future interest payments
under the new senior secured credit facilities, with any ineffectiveness recorded as a charge or credit to earnings, or
we could terminate the swap resulting in an immediate charge or credit to earnings.
We plan capital expenditures of approximately $75 to $80 million in fiscal year 2007, excluding potential
acquisitions and share repurchases.These capital expenditures primarily relate to the development of additional
Partner Drive-Ins, retrofit of existing Partner Drive-Ins and other drive-in level expenditures.We expect to fund these
capital expenditures through cash flow from operations and borrowings under our new senior secured credit facility.
Sonic Corp. 2006 Annual Report
27
Management’s Discussion and
Analysis of Financial Condition
and Results of Operations