Sonic 2009 Annual Report Download - page 41

Notes to Consolidated Financial Statements
August 31, 2009, 2008 and 2007 (In thousands, except per share data)
Maturities of long-term debt for each of the five years afterAugust 31, 2009 are $52,699 in 2010, $70,234 in 2011, $89,309 in 2012,
$487,004 in 2013, and $304 thereafter.
In October 2006, the company refinanced its senior unsecured notes and line of credit and funded a tender offer to repurchase shares
of its common stock with proceeds from a senior secured credit facility until the Class A-2 senior notes were financed in December 2006.
Loan origination costs associated with this debt totaled $4,631 and the unamortized loan origination costs of $4,544 were expensed as
debt extinguishment costs when the financing was closed in December 2006.
In December 2006, various subsidiaries of the company issued $600,000 of Class A-2 senior notes in a private transaction. The
proceeds were used to refinance the outstanding balance under the senior secured credit facility, along with costs associated with the
transaction. The Class A-2 notes are the first issuance under a facility that will allow Sonic to issue additional series of notes in the future
subject to certain conditions. These notes have a fixed interest rate of 5.7%, subject to upward adjustment after the expected six-year
repayment term. Loan origination costs associated with this debt totaled $23,378, and the unamortized balance of $11,071 is categorized
as debt origination costs, net, on the Consolidated Balance Sheet as of August 31, 2009. Amortization of these loan costs and the hedge
loss discussed below produces an overall weighted average interest cost of 6.8%. The Class A-2 notes have an expected life of six years,
with a legal final repayment date in December 2031. If the debt extends beyond the expected life, rapid amortization and cash trapping
provisions of the debt agreements will be triggered which will cause the remaining principal balance to be given higher priority of
payment from the secured sources.
The company anticipates paying the debt in full based on the expected life.
In connection with issuance of the Class A-2 notes, various subsidiaries of the company also completed a securitized financing
facility of Class A-1 senior variable funding notes. This facility allows for the issuance of up to $200,000 of notes and certain other credit
instruments, including letters of credit. Considering the $187,250 outstanding at August 31, 2009 and $325 in outstanding letters of
credit, $12,425 was unused and available under the Class A-1 notes. The effective interest rate on the outstanding balance for the Class
A-1 notes at August 31, 2009 and 2008 was 1.42% and 3.69%, respectively. There is a commitment fee on the unused portion of the
Class A-1 notes of 0.5%. During fiscal year 2009, upon request of the company to draw down the remaining $12,250 in Class A-1 senior
variable funding notes from the lender who committed to advance one-half of the funds for the variable funding notes, the lender, which
had previously filed for Chapter 11 bankruptcy, notified the company that it could not meet its obligation. The company no longer
considers the $12,250, to be available.
The Class A-1 and Class A-2 senior notes were issued by special purpose, bankruptcy remote, indirect subsidiaries of the company
that hold substantially all of Sonic’s franchising assets and Partner Drive-In real estate used in operation of the company’s existing
business. As of August 31, 2009, total assets for these combined indirect subsidiaries were approximately $466,000, including receivables
for royalties, Partner Drive-In real estate, intangible assets, loan origination costs and restricted cash balances of $35,369. The Class
A-1 and Class A-2 notes are secured by Sonic’s franchise royalty payments, certain lease and other payments and fees and, as a result,
the repayment of these notes is expected to be made solely from the income derived from these indirect subsidiaries’ assets. Sonic
Industries LLC, which is the subsidiary that acts as franchisor, has guaranteed the obligations of the co-issuers and pledged substantially
all of its assets to secure such obligations.
The third-party insurance company that provides credit enhancements in the form of financial guaranties of our ClassA-1 and Class
A-2 note payments has been the subject of credit rating downgrades by Standard & Poor’s and Moody’s, which ratings were CC and Caa2,
respectively at October 29, 2009. We are unable to determine whether additional downgrades may occur and what impact prior
downgrades have had or additional downgrades would have on our insurer’s financial condition. If the insurance company were to
become the subject of insolvency or similar proceedings, our lenders would not be required to fund additional amounts on our Class
A-1 variable funding notes. In addition, an event of default would occur if: (i) the insurance company were to become the subject of
insolvency or similar proceedings and (ii) the insurance policy were not continued or sold to a third party (who would assume the
insurance company’s obligations under the policy), but instead were terminated or canceled as a result of those proceedings. In an event
of default, all unpaid amounts under the Class A-1 and Class A-2 notes could become immediately due and payable only at the direction
or consent of holders with a majority of the outstanding principal. While no assurance can be provided, if this were to occur, we believe
that we could negotiate mutually acceptable terms with our lenders or obtain alternate funding.
Although the company does not guarantee the Class A-1 and Class A-2 notes, the company has agreed to cause the performance
of certain obligations of its subsidiaries, principally related to the servicing of the assets included as collateral for the notes and certain
indemnity obligations.
In August 2006, the company entered into a forward starting swap agreement with a financial institution to hedge part of the
exposure to changing interest rates until new financing was closed in December 2006. The forward starting swap was designated as a
cash flow hedge, and was subsequently settled in conjunction with the closing of the Class A-2 notes, as planned. The loss resulting from
settlement of $5,640 ($3,483, net of tax) was recorded in accumulated other comprehensive income and is being amortized to interest
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