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Debt
 9 Months Ended
Sep. 30, 2022
Debt  
Debt

Note 7 – Debt

 

Federal Home Loan Bank

  

In July 2017, KICO became a member of, and invested in the Federal Home Loan Bank of New York (“FHLBNY”).  KICO is required to maintain an investment in capital stock of FHLBNY.  Based on redemption provisions of FHLBNY, the stock has no quoted market value and is carried at cost.  At its discretion, FHLBNY may declare dividends on the stock.  Management reviews for impairment based on the ultimate recoverability of the cost basis in the stock. At September 30, 2022 and December 31, 2021, no impairment has been recognized. FHLBNY members have access to a variety of flexible, low-cost funding through FHLBNY’s credit products, enabling members to customize advances, which are to be fully collateralized.  Eligible collateral to pledge to FHLBNY includes residential and commercial mortgage-backed securities, along with U.S. Treasury and agency securities. See Note 3 – Investments for eligible collateral held in a designated custodian account available for future advances.  Advances are limited to 5% of KICO’s net admitted assets as of the previous quarter and are due and payable within one year of borrowing.  KICO is currently able to borrow on an overnight basis. The maximum allowable advance as of September 30, 2022 was approximately $12,414,000. Advances are limited to 85% of the amount of available collateral. As of September 30, 2022, the estimated fair value of available collateral was $12,393,000.  Accordingly, as of September 30, 2022, advances were limited to $10,534,000. As of December 31, 2021, there was no available collateral. There have been no borrowings under this facility since KICO became a member of FHLBNY.

Debt

 

On December 19, 2017, the Company issued $30 million of its 5.50% Senior Unsecured Notes due December 30, 2022 (the “Notes”) in an underwritten public offering. Interest is payable semi-annually in arrears on June 30 and December 30 of each year, which began on June 30, 2018 at the rate of 5.50% per annum. The net proceeds of the issuance were $29,121,630, net of discount of $163,200 and transaction costs of $715,170, for an effective yield of 5.67% per annum. The balance of debt as of September 30, 2022 and December 31, 2021 is as follows:

 

 

 

 September 30,

 

 

 December 31,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

5.50% Senior Unsecured Notes

 

$30,000,000

 

 

$30,000,000

 

Discount

 

 

(8,110)

 

 

(32,442)

Issuance costs

 

 

(35,964)

 

 

(143,767)

Debt, net

 

$29,955,926

 

 

$29,823,791

 

 

The Notes are unsecured obligations of the Company and are not the obligations of or guaranteed by any of the Company's subsidiaries. The Notes rank senior in right of payment to any of the Company's existing and future indebtedness that is by its terms expressly subordinated or junior in right of payment to the Notes. The Notes rank equally in right of payment to all of the Company's existing and future senior indebtedness, but will be effectively subordinated to any secured indebtedness to the extent of the value of the collateral securing such secured indebtedness. In addition, the Notes will be structurally subordinated to the indebtedness and other obligations of the Company's subsidiaries. The Company may redeem the Notes, at any time in whole or from time to time in part, at the redemption price equal to the greater of: (i) 100% of the principal amount of the Notes to be redeemed; and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the Notes to be redeemed that would be due if the Notes matured on the applicable redemption date (exclusive of interest accrued to the applicable redemption date) discounted to the redemption date on a semi-annual basis at the Treasury Rate, plus 50 basis points (“Make Whole Call”).

  

Due to the Make Whole Call, management intends to retire or otherwise satisfy the Notes at or close to the scheduled maturity date in December 2022. See Note 2 – Accounting Policies - Management’s Plan Related to Going Concern for a discussion of Kingstone’s plans with regard to the satisfaction of the Notes.

 

The Company used an aggregate $28,256,335 of the net proceeds from the offering to contribute capital to KICO in order to support additional growth. The remainder of the net proceeds was used for general corporate purposes. A registration statement relating to the debt issued in the offering was filed with the SEC, which became effective on November 28, 2017.

 

Capital Lease

 

On October 27, 2022 KICO entered into a sale leaseback transaction, whereby KICO sold $8,096,824 of fixed assets to a bank.  The provisions of the sale leaseback require KICO to pay a monthly payment of principal and interest totaling $126,877 for a term of 60 months commencing on October 27, 2022.  The terms of the agreement provide buyout options at the end of the 60 month term, which are as follows: 

 

 

·

At the end of the lease KICO may purchase the fixed assets for a purchase price of $2,024,206, which is 25% of the original fixed asset cost of $8,096,824; or

 

 

 

 

·

KICO may renew the lease for 16 months at the same rental rate, which totals $2,030,036

 

A provision of the sale leaseback agreement requires KICO to pledge collateral for the lease obligation.  KICO pledged a total of $9,958,700 in United States Treasury Bills. See Note 13 - Subsequent Events.