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Note 11 - Long Term Debt

12 Months Ended

Dec. 31, 2020

11.

Long Term Debt

As of December 31, 2020 and December 31, 2019, the Company’s borrowings were comprised of the following:

	December 31,
(in thousands)	2020			2019
Term loan	$	40,000		$	54,997
Revolving line		9,400			-
Less: unamortized deferred financing costs		(1,393	)		(1,180	)
Total debt		48,007			53,817
Less: current installments		(2,000	)		(3,200	)
Less: excess cash flow sweep		-			(4,093	)
Current unamortized deferred financing costs		279			393
Long-term debt	$	46,286		$	46,917

The aggregate amounts of debt maturing during the next five years are as follows:

(in thousands)
2021	$	2,000
2022		3,000
2023		3,000
2024		4,000
2025		37,400
	$	49,400

On December 22, 2020, the Company entered into a Credit Agreement (the “Credit Agreement”) with Citizens Bank, N.A., Wells Fargo Bank, National Association, and Silicon Valley Bank, (together, the “Lenders”). The Credit Agreement provides for a term loan of $40.0 million and a $25.0 million senior revolving credit facility (including a $10.0 million sub-facility for the issuance of letters of credit and a $ 10.0 million swingline loan sub-facility) (collectively, the “Citizens Credit Facility”). The Company’s obligations under the Credit Agreement are guaranteed by certain of the Company’s direct, domestic wholly-owned subsidiaries; none of the Company’s direct or indirect foreign subsidiaries has guaranteed the Citizens Credit Facility. The Company’s obligations under the Credit Agreement are secured by substantially all of the assets of Harvard Bioscience, Inc. and each guarantor (including all or a portion of the equity interests in certain of the Company’s domestic and foreign subsidiaries). The Citizens Credit Facility matures on December 22, 2025. Issuance costs of $1.3 million are amortized over the contractual term to maturity date on a straight-line basis, which approximates the effective interest method. As of December 31, 2020, available borrowing capacity under the revolving line of credit was $15.6 million.

The Credit Agreement replaces the Company’s prior credit facility (the “Prior Credit Facility”) for which Cerberus Business Finance, LLC, served as collateral agent and administrative agent. The Prior Credit Facility consisted of a revolving credit facility and a term loan and was scheduled to expire on January 31, 2023. On December 22, 2020, the Company paid the Prior Credit Facility outstanding borrowing balance of $46.7 million, paid $0.6 million in debt extinguishment costs, and wrote off the remaining balance of its unamortized debt issuance cost which amounted to $0.8 million. The write-off of the unamortized debt issuance costs is included in the Other expense – debt extinguishment and related costs in the Consolidated Statements of Operations. The Company financed the payoff of the outstanding borrowings under the Prior Credit Facility with borrowings under the Citizens Credit Facility.

Borrowings under the Citizens Credit Facility will, at the option of the Company, bear interest at either (i) a rate per annum based on LIBOR for an interest period of one, two, three or six months, plus an applicable interest rate margin determined as provided in the Credit Agreement (a “LIBOR Loan”), or (ii) an alternative base rate plus an applicable interest rate margin, each as determined as provided in the Credit Agreement (an “ABR Loan”). LIBOR interest under the Credit Agreement is subject to applicable market rates and a floor of 0.50 %. The alternative base rate is based on the Citizens Bank prime rate or the federal funds effective rate of the Federal Reserve Bank of New York and is subject to a floor of 1.0%. The applicable interest rate margin varies from 2.0% per annum to 3.25% per annum for LIBOR Loans, and from 1.5% per annum to 3.0% per annum for ABR Loans, in each case depending on the Company’s consolidated leverage ratio and is determined in accordance with a pricing grid set forth in the Credit Agreement (the “Pricing Grid”). Interest on LIBOR Loans is payable in arrears on the last day of each applicable interest period, and interest on ABR Loans is payable in arrears at the end of each calendar quarter. There are no prepayment penalties in the event the Company elects to prepay and terminate the Citizens Credit Facility prior to its scheduled maturity date, subject to LIBOR breakage and redeployment costs in certain circumstances.

Commencing on March 31, 2021, the outstanding term loans amortizes in equal quarterly installments equal to $0.5 million per quarter on such date and during each of the next three quarters thereafter, $0.75 million per quarter during the next eight quarters thereafter and $1.0 million per quarter thereafter, with a balloon payment at maturity. Furthermore, within ninety days after the end of the Company’s fiscal year ended December 31, 2021 and for each fiscal year thereafter, the term loans may be permanently reduced pursuant to certain mandatory prepayment events including an annual “excess cash flow sweep” of 50% of the consolidated excess cash flow, as defined in the agreement; provided that, in any fiscal year, any voluntary prepayments of the term loans shall be credited against the Company’s “excess cash flow” prepayment obligations on a dollar-for-dollar basis for such fiscal year. Amounts outstanding under the revolving credit facility can be repaid at any time but are due in full at maturity.

The Credit Agreement requires the Company pay (i) a fee on the average daily unused amount of the revolving loan of the Citizens Credit Facility payable at a rate which varies from 0.25% to 0.50% depending on the Company’s consolidated net leverage ratio, as determined in accordance with the Pricing Grid, (ii) a fee for each outstanding letter of credit at a rate per annum equal to the applicable interest rate margin for LIBOR Loans, as determined in accordance with the Pricing Grid, multiplied by the average daily amount available to be drawn under such letter of credit, and (iii) to the letter-of-credit issuer, a fronting fee which shall be at a rate agreed upon by the Company and the Lenders based on the average daily amount of the outstanding aggregate letter-of-credit obligations under the Credit Agreement.

The Credit Agreement includes customary affirmative, negative, and financial covenants binding on the Company. The negative covenants limit the ability of the Company, among other things, to incur debt, incur liens, make investments, sell assets and pay dividends on its capital stock. The financial covenants include a maximum consolidated net leverage ratio and a minimum consolidated fixed charge coverage ratio, each of which will be tested at the end of each fiscal quarter of the Company. The Credit Agreement also includes customary events of default.

As of December 31, 2020, the weighted effective interest rate on the Credit Agreement borrowings was 3.25%. The carrying value of the debt approximates fair value because the interest rate under the obligation approximates market rates of interest available to the Company for similar instruments.

On April 18, 2020, the Company entered into a promissory note with PNC Bank, National Association, which provided for a loan in the amount of $6.1 million (the “PPP Loan”) pursuant to the Paycheck Protection Program (the “PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). On April 23, 2020, the SBA, in consultation with the U.S. Department of the Treasury issued guidance regarding consideration of alternate available sources of liquidity and its impact on qualification for PPP loans. The Company reassessed its business plans and liquidity available under its existing credit facility and elected to repay all PPP funds. The PPP Loan was repaid in full on May 4, 2020.

Derivatives

The Company uses interest-rate-related derivative instruments to manage its exposure related to changes in interest rates on its variable-rate debt instruments. The Company does not enter into derivative instruments for any purpose other than cash flow hedging. The Company does not speculate using derivative instruments.

By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with carefully selected major financial institutions based upon their credit profile.

Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

The Company assesses interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor interest rate risk attributable to both the Company’s outstanding and forecasted debt obligations as well as the Company’s offsetting hedge positions. The risk management control systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on the Company’s future cash flows.

The Company uses variable-rate LIBOR debt to finance its operations. The debt obligations expose the Company to variability in interest payments due to changes in interest rates. Management believes that it is prudent to limit the variability of a portion of its interest payments. To meet this objective, management enters into LIBOR based interest rate swap agreements to manage fluctuations in cash flows resulting from changes in the benchmark interest rate of LIBOR. These swaps change the variable-rate cash flow exposure on the debt obligations to fixed cash flows. Under the terms of the interest rate swaps, the Company receives LIBOR based variable interest rate payments and makes fixed interest rate payments, thereby creating the equivalent of fixed-rate debt for the notional amount of its debt hedged.

On January 31, 2018, the Company entered into the Prior Credit Facility, which comprised of a $64.0 million term loan and up to a $25.0 million revolving line of credit. Shortly after entering into the Prior Credit Facility, the Company entered into an interest rate swap contract with PNC Bank with a notional amount of $36.0 million and a termination date of January 1, 2023 in order to hedge the risk of changes in the effective benchmark interest rate (LIBOR) associated with the Company’s Term Loan. The swap contract converted specific variable-rate debt into fixed-rate debt and fixed the LIBOR rate associated with a portion of the term loan under the Prior Credit Facility at 2.72%. The interest rate swap was designated as a cash flow hedge instrument in accordance with ASC 815 “Derivatives and Hedging”.

In connection with the Credit Agreement entered into on December 22, 2020, the Company paid $0.5 million to cancel its outstanding interest rate swap agreement with PNC Bank (notional value of $23.0 million). The cancellation amount represented the fair value of the contracts at the time and was recorded as debt extinguishment and related costs in the Consolidated Statements of Operations.

The following table presents the notional amount and fair value of the Company’s derivative instruments as of December 31, 2019.

		31-Dec-19
		Notional Amount		Fair Value (a)
Derivatives instruments	*Balance sheet classification*	(in thousands)
Interest rate swaps	Other long-term liabilities	$	28,821	$	(603	)

(a) See Note 12 for the fair value measurements related to these financial instruments.

All of the Company’s derivative instruments are designated as hedging instruments. The Company has structured its interest rate swap agreements to be 100% effective and as a result, there was no impact to earnings resulting from hedge ineffectiveness. Changes in the fair value of interest rate swaps designated as hedging instruments that effectively offset the variability of cash flows associated with variable-rate, long-term debt obligations are reported in accumulated other comprehensive income (AOCI). These amounts subsequently are reclassified into interest expense as a yield adjustment of the hedged interest payments in the same period in which the related interest affects earnings. The Company’s interest rate swap agreement was deemed to be fully effective in accordance with ASC 815, and, as such, unrealized gains and losses related to these derivatives were recorded as AOCI.

The following table summarizes the effect of derivatives designated as cash flow hedging instruments and their classification within comprehensive loss for the years ended December 31, 2020 and 2019:

Derivatives in Hedging Relationships	Amount of gain (loss) recognized in
	OCI on derivative (effective portion)
	Year Ended December 31,
(in thousands)	2020			2019
Interest rate swaps	$	(206	)	$	(572	)

The following table summarizes the reclassifications out of accumulated other comprehensive loss for the year ended December 31, 2020 and 2019:

Details about AOCI Components	Amount reclassified from AOCI
	into income (effective portion)
	Year Ended December 31,				Location of amount reclassified
(in thousands)	2020		2019		into income (effective portion)
Interest rate swaps	$	319	$	139	Interest expense
Interest rate swaps settlement		490		-	Debt extinguishment and related costs
Total	$	809	$	139