NOTE 11. Debt

2018 Credit Agreement and Debt Refinancing

On February 12, 2018, concurrently with the closing of the IPO, the Company entered into the 2018 Credit Agreement under which we received seven‑year term loans in an original aggregate principal amount of $360.0 million and established a five‑year revolving credit facility (which was unfunded as of closing) with original aggregate commitments of $50.0 million. On May 3, 2018, the 2018 Credit Agreement was amended to increase aggregate commitments for the revolving credit facility from $50.0 million to $100.0 million.

Net proceeds of $355.9 million from the term loans under the 2018 Credit Agreement and $143.0 million from the IPO, as well as cash on hand of $0.8 million, were used to repay all of the indebtedness outstanding under the 2014 Credit Agreement ($499.7 million of term loans) on February 12, 2018. The 2014 Credit Agreement was terminated on this date.

Original issue discount was $0.9 million for the term loans under the 2018 Credit Agreement and $0.3 million for the revolving credit facility under the 2018 Credit Agreement. The Company incurred a total of $3.7 million in arranger fees and other third party costs related to the 2018 Credit Agreement: $1.8 million was recorded as debt issuance costs and $1.9 million was expensed in general and administrative expense in the consolidated statements of operations as costs related to modified debt. The Company recognized a $6.1 million loss on debt extinguishment, which consisted of the write-off of $4.2 million in unamortized debt issuance costs and $1.9 million in unamortized debt discount.

In conjunction with the May 3, 2018 amendment to the 2018 Credit Agreement, the Company incurred $0.4 million in original issue discount and legal and other fees which were recorded as debt issuance costs in other assets in the Consolidated Balance Sheets.

2019 Credit Agreement

On July 1, 2019, concurrent with the USAA AMCO Acquisition, the Company (i) entered into the 2019 Credit Agreement, (ii) repaid all indebtedness outstanding under the 2018 Credit Agreement, and (iii) terminated the 2018 Credit Agreement.

The 2019 Credit Agreement was entered into among Victory, as borrower, the lenders from time to time party thereto and Barclays Bank PLC, as administrative agent and collateral agent, pursuant to which we obtained a seven-year term loan in an aggregate principal amount of $1.1 billion and established a five-year revolving credit facility (which was unfunded as of the closing date) with aggregate commitments of $100.0 million (with a $10.0 million sub-limit for the issuance of letters of credit). Amounts outstanding under the 2019 Credit Agreement bear interest at an annual rate equal to, at the option of the Company, either LIBOR (adjusted for reserves) plus a margin of 3.25% or an alternate base rate plus a margin of 2.25%.

The obligations of the Company under the 2019 Credit Agreement are guaranteed by the USAA Acquired Companies and all of our other domestic subsidiaries (other than VCA) (the “Guarantors”) and secured by substantially all of the assets of the Company and the Guarantors, subject in each case to certain customary exceptions.

The 2019 Credit Agreement contains customary affirmative and negative covenants, including covenants that affect, among other things, the ability of the Company and its subsidiaries to incur additional indebtedness, create liens, merge or dissolve, make investments, dispose of assets, engage in sale and leaseback transactions, make distributions and dividends and prepayments of junior indebtedness, engage in transactions with affiliates, enter into restrictive agreements, amend documentation governing junior indebtedness, modify its fiscal year and modify its organizational documents, subject to customary exceptions, thresholds, qualifications and “baskets.” In addition, the 2019 Credit Agreement contains a financial performance covenant, requiring a maximum first lien leverage ratio, measured as of the last day of each fiscal quarter on which outstanding borrowings under the revolving credit facility exceed 35.0% of the commitments thereunder (excluding certain letters of credit), of no greater than 3.80 to 1.00. As of December 31, 2019, there were no outstanding borrowings under the revolving credit facility and we were in compliance with our financial performance covenant.

Original issue discount was $11.5 million for the term loans under the 2019 Credit Agreement and $1.5 million for the revolving credit facility under the 2019 Credit Agreement. The Company incurred a total of $22.8 million in other third party costs related to the 2019 Credit Agreement and recorded $18.0 million as term loan debt issuance costs, $0.3 million as revolving credit facility debt issuance cost and $4.5 million as expense related to modified debt in general and administrative in the Consolidated Statements of Operations.

A total of approximately $148.0 million of the outstanding term loans under the 2019 Credit Agreement was repaid in 2019. Subsequent to December 31, 2019, we repaid an additional $38.0 million, for a total principal debt reduction of approximately $186.0 million since July 1, 2019, thus satisfying the required principal payment of 1.00% of the original principal amount per year through the term of the loan, June 2026.

During the year ended December 31, 2019, we recognized a $9.9 million loss on debt extinguishment, which consisted of the write-off of $6.3 million and $3.6 million of unamortized debt issuance costs and debt discount, respectively, due to the termination of the previous credit agreement and repayments of term loan principal. Debt extinguishment costs relating to the termination of the 2018 Credit Agreement and repayments of term loan principal under the 2019 Credit Agreement totaled $5.5 million and $4.4 million, respectively. 

2020 Debt Refinancing

On January 17, 2020, we entered into the First Amendment (the “First Amendment”) to the 2019 Credit Agreement with the other loan parties thereto, Barclays Bank PLC, as administrative agent, and the Royal Bank of Canada as fronting bank.

Pursuant to the First Amendment, the Company refinanced the existing term loans (the “Existing Term Loans”) with replacement term loans in an aggregate principal amount of $952.0 (the “Repriced Term Loans”). The Repriced Term Loans provide for substantially the same terms as the Existing Term Loans, including the same maturity date of June 2026, except that the Repriced Term Loans provide for a reduced applicable margin on LIBOR of 75 basis points. The applicable margin on LIBOR under the Repriced Term Loans is 2.50%, compared to 3.25% under the Existing Term Loans.

The following table presents the components of long-term debt in the Consolidated Balance Sheets at December 31, 2019 and 2018.

As of December 31, 2019, the outstanding term loans under the 2019 Credit Agreement had an interest rate of 5.35% per annum. Including the impact of amortization of debt issuance costs and original issue discount described herein, the effective yield for term loans under the 2019 Credit Agreement as of December 31, 2019 was 5.79% per annum.

Debt issuance costs related to the Term Loans totaled $39.6 million and $21.6 million at December 31, 2019 and 2018 and are reflected net of accumulated amortization and loss on debt extinguishment of $22.4 million and $14.0 million, respectively. Debt issuance costs of $3.7 million and $2.0 million related to the revolving credit facility are included in other assets in the Consolidated Balance Sheets and are reflected net of accumulated amortization and loss on debt extinguishment of $1.5 million and $1.2 million as of December 31, 2019 and 2018, respectively. Debt discount related to the Term Loans totaled $20.7 million and $9.2 million at December 31, 2019 and 2018 and is reflected net of accumulated amortization and loss on debt extinguishment of $10.5 million and $5.7 million, respectively.

The following table presents the components of interest expense and other financing costs on the Consolidated Statements of Operations for the years ended December 31, 2019, 2018 and 2017.