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Debt | 9 Months Ended
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Sep. 30, 2022
Debt |
Debt | 8. Debt Senior Secured Notes 2024 In connection with the closing of the Business Combination, Arrow Bidco, LLC, a Delaware limited liability company (“Bidco”) issued $340 million in aggregate principal amount of 9.50% senior secured notes due March 15, 2024 (the “2024 Senior Secured Notes” or “Notes”) under an indenture dated March 15, 2019 (the “Indenture”). The Indenture was entered into by and among Bidco, the guarantors named therein (the “Note Guarantors”), and Deutsche Bank Trust Company Americas, as trustee and as collateral agent. Interest is payable semi-annually on September 15 and March 15 and began September 15, 2019. Refer to table below for a description of the amounts related to the Notes. ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | ​ | Principal |  | ​ | Unamortized Original Issue Discount |  | ​ | Unamortized Deferred Financing Costs
9.50% Senior Secured Notes, due 2024 | ​ | $ | 340,000 | ​ | $ | 1,155 | ​ | $ | 5,570
​ If Bidco undergoes a change of control or sells certain of its assets, Bidco may be required to offer to repurchase the Notes. On or after March 15, 2021, Bidco at its option, may redeem the Notes, in whole or part, upon not less than fifteen (15) and not more than sixty (60) days’ prior written notice to holders and not less than twenty (20) days’ prior written notice to the trustee (or such shorter timeline as the trustee may agree), at the redemption price expressed as a percentage of principal amount set forth below, plus accrued and unpaid interest thereon but not including the applicable redemption date (subject to the right of Note holders on the relevant record date to receive interest due on an interest payment date falling on or prior to the redemption date), if redeemed during the 12-month period beginning August 15 of each of the years set below. ​
​ | ​ | ​
​ | ​ | Redemption
Year |  | Price
2022 | ​ | 102.375%
2023 and thereafter | ​ | 100.000%
​ The Notes are unconditionally guaranteed by Topaz Holdings LLC, a Delaware limited liability company (“Topaz”) and each of Bidco’s direct and indirect wholly-owned domestic subsidiaries (collectively, the “Note Guarantors”). Target Hospitality is not an issuer or a guarantor of the Notes. The Note Guarantors are either borrowers or guarantors under the ABL Facility. To the extent lenders under the ABL Facility release the guarantee of any Note Guarantor, such Note Guarantor is also released from obligations under the Notes. These guarantees are secured by a second priority security interest in substantially all of the assets of Bidco and the Note Guarantors (subject to customary exclusions). The guarantees of the Notes by TLM Equipment, LLC, a Delaware limited liability company (“TLM Equipment LLC”) which holds certain of Target Hospitality’s assets, are subordinated to its obligations under the ABL Facility (as defined below). The Notes contain certain negative covenants, including limitations that restrict Bidco’s ability and the ability of certain of its subsidiaries, to directly or indirectly, create additional financial obligations. With certain specified exceptions, these negative covenants prohibit Bidco and certain of its subsidiaries from: creating or incurring additional debt; paying dividends or making any other distributions with respect to its capital stock; making loans or advances to Bidco or any restricted subsidiary of Bidco; selling, leasing or transferring any of its property or assets to Bidco or any restricted subsidiary of Bidco; directly or indirectly creating, incurring or assuming any lien of any kind securing debt on the collateral; or entering into any sale and leaseback transaction. In connection with the issuance of the Notes, there was an original issue discount of approximately $3.3 million and the unamortized balance of approximately $1.2 million is presented on the face of the consolidated balance sheet as of September 30, 2022 as a reduction of the principal. The discount is amortized over the life of the Notes using the effective interest method. Bidco’s ultimate parent, Target Hospitality, has no significant independent assets or operations except as included in the guarantors of the Senior Secured Notes, the guarantees under the Notes are full and unconditional and joint and several, and any subsidiaries of Target Hospitality that are not subsidiary guarantors of the Notes are minor. There are also no significant restrictions on the ability of Target Hospitality or any guarantor to obtain funds from its subsidiaries by dividend or loan. See discussion of certain negative covenants above. Therefore, pursuant to the SEC Rules, no individual guarantor financial statement disclosures are deemed necessary. Capital Lease and Other Financing Obligations The Company’s capital lease and other financing obligations as of September 30, 2022 consisted of approximately $1.5 million of capital leases. The capital leases pertain to leases entered into during 2019 through 2022, for commercial-use vehicles with 36-month terms expiring through 2025 with a weighted average interest rate of approximately 3.83%. The Company’s capital lease and other financing obligations as of December 31, 2021 consisted of approximately $1.4 million of capital leases related to commercial-use vehicles with the same terms as described above. ABL Facility On the Closing Date, in connection with the closing of the Business Combination, Topaz, Bidco, Target, Signor and each of their domestic subsidiaries entered into an ABL credit agreement that provides for a senior secured asset based revolving credit facility in the aggregate principal amount of up to $125 million (the “ABL Facility”). The historical debt of Bidco, Target and their respective subsidiaries under the former ABL facility of Algeco Seller was settled at the time of the consummation of the Business Combination on the Closing Date. Approximately $40 million of proceeds from the ABL Facility were used to finance a portion of the consideration payable and fees and expenses incurred in connection with the Business Combination. During 2021, the Company repaid a net amount of $48 million of borrowings under the ABL Facility from excess cash available which reduced the outstanding balance to $0 as of December 31, 2021. During the nine months ended September 30, 2022, $70 million was drawn and $70 million was repaid on the ABL Facility resulting in an outstanding balance of $0 as of September 30, 2022. Borrowings under the ABL Facility, at the relevant borrower’s (the borrowers under the ABL Facility, the “ABL Borrowers”) option, bear interest at either (1) an adjusted LIBOR or (2) a base rate, in each case plus an applicable margin. The applicable margin is 2.50% with respect to LIBOR borrowings and 1.50% with respect to base rate borrowings. Commencing at the completion of the first full fiscal quarter after the Closing Date, the applicable margin for borrowings under the ABL Facility is subject to one step-down of 0.25% and one step-up of 0.25%, based on achieving certain excess availability levels with respect to the ABL Facility. The ABL Facility provides borrowing availability of an amount equal to the lesser of (i) (a) $125 million and (b) the Borrowing Base (defined below) (the “Line Cap”). The Borrowing Base is, at any time of determination, an amount (net of reserves) equal to the sum of:
| ● | 85% of the net book value of the Borrowers’ eligible accounts receivables, plus
| ● | the lesser of (i) 95% of the net book value of the Borrowers’ eligible rental equipment and (ii) 85% of the net orderly liquidation value of the Borrowers’ eligible rental equipment, minus
| ● | customary reserves
The ABL Facility includes borrowing capacity available for standby letters of credit of up to $15 million and for ‘‘swingline’’ loan borrowings of up to $15 million. Any issuance of letters of credit or making of a swingline loan will reduce the amount available under the ABL Facility. In addition, the ABL Facility will provide the Borrowers with the option to increase commitments under the ABL Facility in an aggregate amount not to exceed $75 million plus any voluntary prepayments that are accompanied by permanent commitment reductions under the ABL Facility. The termination date of the ABL Facility is September 15, 2023. The obligations under the ABL Facility are unconditionally guaranteed by Topaz and each existing and subsequently acquired or organized direct or indirect wholly-owned U.S. organized restricted subsidiary of Bidco (together with Topaz, the “ABL Guarantors”), other than certain excluded subsidiaries. The ABL Facility is secured by (i) a first priority pledge of the equity interests of Topaz, Bidco, Target, and Signor (the “Borrowers) and of each direct, wholly-owned US organized restricted subsidiary of any Borrower or any ABL Guarantor, (ii) a first priority pledge of up to 65% of the voting equity interests in each non-US restricted subsidiary of any Borrower or ABL Guarantor and (iii) a first priority security interest in substantially all of the assets of the Borrower and the ABL Guarantors (in each case, subject to customary exceptions). The ABL Facility requires the Borrowers to maintain a (i) minimum fixed charge coverage ratio of 1.00:1.00 and (ii) maximum total net leverage ratio of 4.00:1.00, at any time when the excess availability under the ABL Facility is less than the greater of (a) $15.625 million and (b) 12.5% of the Line Cap. The ABL Facility also contains a number of customary negative covenants. Such covenants, among other things, limit or restrict the ability of each of the Borrowers, their restricted subsidiaries, and where applicable, Topaz, to:
| ● | incur additional indebtedness, issue disqualified stock and make guarantees;
| ● | incur liens on assets;
| ● | engage in mergers or consolidations or fundamental changes;
| ● | sell assets;
| ● | pay dividends and distributions or repurchase capital stock;
| ● | make investments, loans and advances, including acquisitions;
| ● | amend organizational documents and master lease documents;
| ● | enter into certain agreements that would restrict the ability to pay dividends;
| ● | repay certain junior indebtedness; and
| ● | change the conduct of its business.
The aforementioned restrictions are subject to certain exceptions including (i) the ability to incur additional indebtedness, liens, investments, dividends and distributions, and prepayments of junior indebtedness subject, in each case, to compliance with certain financial metrics and certain other conditions and (ii) a number of other traditional exceptions that grant the ABL Borrowers continued flexibility to operate and develop their businesses. The ABL Facility also contains certain customary representations and warranties, affirmative covenants and events of default. The carrying value of debt outstanding as of the dates indicated below consist of the following: ​
​ | ​ | ​ | ​ | ​ | ​ | ​
​ |  | September 30, | ​ | December 31,
​ | ​ | 2022 |  | 2021
Capital lease and other financing obligations | ​ | $ | 1,743 | ​ | $ | 1,425
ABL Facility | ​ |  | — | ​ |  | —
9.50% Senior Secured Notes due 2024, face amount | ​ | ​ | 340,000 | ​ | ​ | 340,000
Less: unamortized original issue discount | ​ | ​ | (1,155) | ​ | ​ | (1,681)
Less: unamortized term loan deferred financing costs | ​ | ​ | (5,570) | ​ | ​ | (8,107)
Total debt, net | ​ |  | 335,018 | ​ |  | 331,637
Less: current maturities | ​ |  | (824) | ​ |  | (729)
Total long-term debt | ​ | $ | 334,194 | ​ | $ | 330,908
​ Interest expense, net The components of interest expense, net (which includes interest expense incurred) recognized in the unaudited consolidated statements of comprehensive income (loss) for the periods indicated below consist of the following: ​
​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​ | ​
​ | For the three months ended | ​ | For the nine months ended
​ | September 30, | ​ | September 30, | ​ | September 30, | ​ | September 30,
​ | 2022 |  | 2021 | ​ | 2022 |  | 2021
Interest incurred on capital lease and other financing obligations | $ | 15 | ​ | $ | 5 | ​ | $ | 43 | ​ | $ | 51
Interest expense incurred on ABL Facility and Notes | ​ | 8,599 | ​ | ​ | 8,201 | ​ | ​ | 25,166 | ​ | ​ | 25,315
Amortization of deferred financing costs on ABL facilities and Notes | ​ | 1,186 | ​ | ​ | 1,097 | ​ | ​ | 3,483 | ​ | ​ | 3,220
Amortization of original issue discount on Notes |  | 180 | ​ | ​ | 162 | ​ |  | 526 | ​ | ​ | 472
Interest capitalized | ​ | (942) | ​ | ​ | — | ​ | ​ | (942) | ​ | ​ | —
Interest income | ​ | (150) | ​ | ​ | — | ​ | ​ | (150) | ​ | ​ | —
Interest expense, net | $ | 8,888 | ​ | $ | 9,465 | ​ | $ | 28,126 | ​ | $ | 29,058
​ Deferred Financing Costs and Original Issue Discount The Company presents unamortized deferred financing costs and unamortized original issue discount as a direct deduction from the principal amount of the Notes on the consolidated balance sheets as of September 30, 2022 and December 31, 2021. Accumulated amortization expense related to the deferred financing costs was approximately $10.3 million and $7.8 million as of September 30, 2022 and December 31, 2021, respectively. Accumulated amortization of the original issue discount was approximately $2.1 million and $1.6 million as of September 30, 2022 and December 31, 2021, respectively. Accumulated amortization related to revolver deferred financing costs for both the former Algeco ABL facility and ABL Facility was approximately $4.5 million and $3.7 million as of September 30, 2022 and December 31, 2021, respectively. Revolver deferred financing costs are presented on the consolidated balance sheets as of September 30, 2022 and December 31, 2021 within deferred financing costs revolver, net. Refer to the components of interest expense in the table above for the amounts of the amortization expense related to the deferred financing costs and original issue discount recognized for each of these debt instruments for the three and nine months ended September 30, 2022 and 2021, respectively. Future maturities The aggregate annual principal maturities of debt and capital lease obligations for each of the next five years and thereafter, based on contractual terms are listed in the table below. The schedule of future maturities as of September 30, 2022, consists of the following: ​
​ | ​ | ​ | ​
Rest of 2022 |  | $ | 213
2023 | ​ |  | 733
2024 | ​ |  | 340,451
2025 | ​ |  | 69
Total | ​ | $ | 341,466
​

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