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Note 5 - Debt and Finance Leases

9 Months Ended

Sep. 30, 2022

Notes to Financial Statements

Debt and Finance Leases Disclosures [Text Block]

NOTE 5: DEBT AND FINANCE LEASES

Debt and finance leases and related maturities and interest rates were as follows:

					*Weighted-Average*				*September 30,*				*December 31,*
(in millions)	*Type*		*Maturity*		*Effective Interest Rate*				*2022*				*2021*
Current portion:
	RED-Rochester, LLC		2033			11.48	%		$	1			$	1
										1				1
Non-current portion:
	Term loans		2026			13.78	%			282				224
	Convertible debt		2026			17.38	%			17				15
	RED-Rochester, LLC		2033			11.48	%			12				12
	Finance leases		Various		Various					—				1
	Other debt		Various		Various					1				1
										312				253
									$	313			$	254

Annual maturities of debt and finance leases outstanding at September 30, 2022 were as follows:

		Carrying				Maturity
		Value				Value
Q4 2022		$	—			$	—
2023			2				2
2024			1				1
2025			1				1
2026			300				367
2027 and thereafter			9				9
Total		$	313			$	380

Term Loan Credit Agreement

On February 26, 2021, the Company entered into a Credit Agreement (the “Term Loan Credit Agreement”) with certain funds affiliated with Kennedy Lewis Investment Management LLC (“KLIM”) as lenders (the “Term Loan Lenders”) and Alter Domus (US) LLC, as administrative agent. Pursuant to the Term Loan Credit Agreement, the Term Loan Lenders provided the Company with (i) an initial term loan in the amount of $225 million, which was drawn in full on the same date, and (ii) a commitment to provide delayed draw term loans in an aggregate principal amount of up to $50 million on or before February 26, 2023 (the “Delayed Draw Term Loans” and collectively, with the initial term loan, the “Term Loans”). Net proceeds from the Term Loan Credit Agreement received on February 26, 2021 were $215 million ($225 million aggregate principal less $10 million in debt transaction costs). The delayed draw term loans were drawn down in full on June 15, 2022. Net proceeds received on June 15, 2022 were $49 million ($50 million of aggregate principal less $1 million in debt transaction costs). The maturity date of the Term Loans is February 26, 2026 and the Term Loans are non-amortizing.

The Term Loans bear interest at a rate of 8.5% per annum payable quarterly in cash and 4.0% per annum payable in cash on the maturity date or quarterly, at EKC’s option, for an aggregate interest rate of 12.5% per annum. The payment of interest only at the maturity date has the same effect as delivering additional debt instruments to the Term Loan Lenders and therefore is considered Paid-in-Kind (“PIK”). The Company elected the 4.0% per annum in PIK which is being added to the carrying value of the debt through the term. Interest expense is being recorded using the effective interest method.

The Term Loans are guaranteed by the Company and certain of its domestic subsidiaries (the “Subsidiary Guarantors”), and are secured by (i) a first priority lien on substantially all assets of the Company and the Subsidiary Guarantors (subject to certain exceptions) not constituting ABL Priority Collateral (as defined in the Amended and Restated Asset Based Revolving Credit Agreement) or L/C Cash Collateral (as defined in the Letter of Credit Facility Agreement), including 100% of the stock of material U.S. subsidiaries and 65% of the stock of material foreign subsidiaries (the “Term Loan Priority Collateral”) and (ii) a third priority lien on the ABL Priority Collateral and L/C Cash Collateral.

The Term Loan Credit Agreement limits, among other things, the ability of the Company and its Restricted Subsidiaries (as defined in the Term Loan Credit Agreement) to (i) incur indebtedness, (ii) incur or create liens, (iii) dispose of assets, (iv) make restricted payments and (v) make investments, and also contains customary affirmative covenants including delivery of certain of the Company’s financial statements set forth therein. The Term Loan Credit Agreement does not include a financial maintenance covenant.

2021 Convertible Notes

On February 26, 2021, the Company entered into a Securities Purchase Agreement with certain funds affiliated with Kennedy Lewis Investment Management LLC (“KLIM”) as lenders (the “Buyers”) pursuant to which the Company sold to the Buyers $25 million aggregate principal amount of the Company’s newly issued 5.0% unsecured convertible promissory notes due May 28, 2026 (the “Convertible Notes”) in a private placement transaction. The Convertible Notes bear interest at a rate of 5.0% per annum, which will be payable in cash on the maturity date and in additional shares of Common Stock on any conversion date. The payment of interest only at the maturity date has the same effect as delivering additional debt instruments to the Holders of the Convertible Notes and therefore is considered PIK. PIK is being added to the carrying value of the debt through the term. Interest expense is being recorded using the effective interest method. The maturity date of the Convertible Notes is May 28, 2026.

Conversion Features

The Buyers have the right to elect at any time to convert the Convertible Notes into shares of Common Stock at an initial conversion rate equal to 100 shares of Common Stock per each $1,000 principal amount of the Convertible Notes (based on an initial conversion price equal to $10.00 per share of Common Stock). The conversion rate and conversion price will be subject to certain customary anti-dilution adjustments.

If the closing price of the Common Stock equals or exceeds $14.50 (subject to adjustment in the same manner as the conversion price) for 45 trading days within any period of 60 consecutive trading days, the Company will have the right to cause the mandatory conversion of the Convertible Notes into shares of Common Stock.

In the event of certain fundamental transactions, the Buyers will have the right, within a period of 30 days following the occurrence of such transaction (“Holder Fundamental Transaction Election Period”), to elect to either require prepayment of the Convertible Notes at par plus accrued and unpaid interest or convert all or a portion of the Convertible Notes into shares of Common Stock at the conversion rate then in effect plus any additional shares based on the price per share of Common Stock in connection with the fundamental transaction, or to receive the shares of a successor entity, if any.

Embedded Derivatives

The Company allocated $12 million of the net proceeds received to a derivative liability based on the aggregate fair value of the embedded features on the date of issuance which reduced the net carrying value of the Convertible Notes. The derivative is being accounted for at fair value with subsequent changes in the fair value being reported as part of Other (income) charges, net in the Consolidated Statement of Operations. The fair value of the Convertible Notes embedded derivative at both September 30, 2022 and December 31, 2021 was a liability of $4 million and is included in Other long-term liabilities in the accompanying Consolidated Statement of Financial Position. Refer to Note 19, “Financial Instruments” for information on the valuation of the derivative.

The carrying value of the Convertible Notes at September 30, 2022 and December 31, 2021 was $17 million and $15 million, respectively. The Convertible Notes unamortized discount at September 30, 2022 and December 31, 2021 was $9 million and $11 million, respectively. The estimated fair value of the Convertible Notes as of September 30, 2022 was $16 million (Level 3). The carrying value is being accreted to the aggregate principal amount using the effective interest method from the date of issuance through the maturity date.