Credit Arrangements and Debt Obligations

3 Months Ended

Mar. 31, 2019

Credit Arrangements and Debt Obligations

CREDIT ARRANGEMENTS AND DEBT OBLIGATIONS

Senior secured credit facilities

The Company’s $1.3 billion senior secured credit facilities consist of a $1.1 billion secured term loan facility (“term loan facility”) and a $225 million multi-currency revolving credit facility (“revolving credit facility”). The term loans mature on November 7, 2023 and require quarterly principal payments of $2.7 million, with the remaining principal balance due on November 7, 2023.

Outstanding term loan borrowings were as follows (in thousands):



	March 31, 2019			December 31, 2018
Term loans	$	1,053,500		$	1,056,188
Deferred financing costs and original issue discount	(8,086		)	(8,568		)
Total debt	1,045,414			1,047,620
Less current maturities	10,750			10,750
Long-term debt	$	1,034,664		$	1,036,870

The revolving credit facility matures on July 31, 2022. Borrowings outstanding on the revolving credit facility were $50.2 million at March 31, 2019 and $118.2 million at December 31, 2018.

All borrowings under the credit agreement are subject to variable interest. On May 31, 2018, the Company amended its existing senior credit facilities to, among other changes, reduce the applicable interest rates of the term loan facility and the revolving credit facility. Effective as of May 31, 2018, borrowings under the term loan facility bear interest at a rate per annum of 0.75% over the base rate, or 1.75% over the eurocurrency rate, which is the one, two, three or six month LIBOR rate or, with applicable lender approval, the twelve month or less than one month LIBOR rate. With respect to the term loan facility, the base rate is subject to an interest rate floor of 1.75% and the eurocurrency rate is subject to an interest rate floor of 0.75%. Borrowings under the revolving credit facility bear interest at a rate per annum ranging from 0.50% to 0.75% over the base rate, or 1.50% to 1.75% over the eurocurrency rate.

The effective interest rate for the term loans was 4.25% and 4.27% at March 31, 2019 and December 31, 2018, respectively, and the weighted average interest rate was 4.25% and 3.61% for the three months ended March 31, 2019 and 2018, respectively, prior to the effects of any interest rate swap arrangements. The effective interest rate for the revolving credit facility was 3.50% and 4.76% at March 31, 2019 and December 31, 2018, respectively. The weighted average interest rate for the revolving credit facility was 4.10% and 3.70% for the three months ended March 31, 2019 and 2018, respectively.

Certain financing fees and original issue discount costs are capitalized and are being amortized over the terms of the related debt instruments and amortization expense is included in interest expense. Amortization expense of deferred financing costs were $0.4 million for the three months ended March 31, 2019 and 2018. Amortization expense of original issue discount costs were $0.1 million for the three months ended March 31, 2019 and 2018.

All obligations under the senior secured credit facilities are secured by substantially all the assets of the Company’s U.S. subsidiaries. The senior secured credit facilities contain a number of covenants that, among other things and subject to certain exceptions, may restrict the ability of Bright Horizons Family Solutions LLC, our wholly-owned subsidiary, and its restricted subsidiaries, to: incur certain liens; make investments, loans, advances and acquisitions; incur additional indebtedness or guarantees; pay dividends on capital stock or redeem, repurchase or retire capital stock or subordinated indebtedness; engage in transactions with affiliates; sell assets, including capital stock of our subsidiaries; alter the business conducted; enter into agreements restricting our subsidiaries’ ability to pay dividends; and consolidate or merge.

In addition, the credit agreement governing the senior secured credit facilities requires Bright Horizons Capital Corp., our direct subsidiary, to be a passive holding company, subject to certain exceptions. The revolving credit facility requires Bright Horizons Family Solutions LLC, the borrower, and its restricted subsidiaries, to comply with a maximum consolidated first lien net leverage ratio that is a quarterly maintenance based financial covenant. A breach of this covenant is subject to certain equity cure rights.

The future principal payments under the term loans at March 31, 2019 were as follows (in thousands):



	Term Loans
Remainder of 2019	$	8,062
2020	10,750
2021	10,750
2022	10,750
2023	1,013,188
	$	1,053,500

Interest Rate Swap Agreements

The Company is subject to interest rate risk as all borrowings under the senior secured credit facilities are subject to variable interest. In 2017, the Company entered into variable-to-fixed interest rate swap agreements to mitigate the exposure to variable interest arrangements on $500 million notional amount of the outstanding term loan borrowings. These swap agreements, designated and accounted for as cash flow hedges from inception, are scheduled to mature on October 31, 2021. The Company is required to make monthly payments on the notional amount at a fixed average interest rate, plus the applicable rate for eurocurrency loans. Effective as of May 31, 2018, the notional amount has been subject to an interest rate of approximately 3.65%. In exchange, the Company receives interest on the notional amount at a variable rate based on the one-month LIBOR rate, subject to a 0.75% floor.

The interest rate swaps are recorded on the Company’s consolidated balance sheet at fair value and classified based on the instruments’ maturity dates. The Company records gains or losses resulting from changes in the fair value of the interest rate swaps to other comprehensive income or loss and subsequently reclassified into earnings and recognized to interest expense in the Company’s consolidated statement of income in the period that the hedged interest expense on the term loan facility is recognized.

The fair value of the interest rate swap agreements was as follows (in thousands):



	Consolidated balance sheet classification	March 31, 2019		December 31, 2018
Interest rate swaps—asset	Other assets	$	3,955	$	7,901

For the three months ended March 31, 2019, the effect of the interest rate swap agreements on other comprehensive income was as follows (in thousands):



Derivatives designated as cash flow hedging instruments	Amount of gain (loss) recognized in other comprehensive income			Consolidated statement of income classification	Amount of net gain (loss) reclassified into earnings			Total effect on other comprehensive income
Interest rate swaps	$	(3,189	)	Interest expense — net	$	757		$	(3,946	)
Income tax effect	858			Income tax expense	(203		)	1,061
Net of income taxes	$	(2,331	)		$	554		$	(2,885	)

For the three months ended March 31, 2018, the effect of the interest rate swap agreements on other comprehensive income was as follows (in thousands):



Derivatives designated as cash flow hedging instruments	Amount of gain (loss) recognized in other comprehensive income			Consolidated statement of income classification	Amount of net gain (loss) reclassified into earnings			Total effect on other comprehensive income
Interest rate swaps	$	6,369		Interest expense — net	$	(366	)	$	6,735
Income tax effect	(1,732		)	Income tax expense	100			(1,832		)
Net of income taxes	$	4,637			$	(266	)	$	4,903

During the next twelve months, the Company estimates that a gain of $2.4 million, pre-tax, will be reclassified from accumulated other comprehensive loss and recorded as a reduction to interest expense, related to these interest rate swap agreements.