DEBT

Credit Agreement

On September 17, 2014, Vectrus entered into a Credit Agreement (the Credit Agreement) by and among Vectrus, our 100% owned subsidiary Vectrus Systems Corporation (VSC), as the Borrower, the Lenders and Issuing Banks party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent. The Credit Agreement provided for $215.0 million in senior secured financing, consisting of a $140.0 million term loan facility (the Term Facility) and a $75.0 million revolving credit facility (the Revolver and, together with the Term Facility, the Senior Secured Credit Facilities). The net proceeds from the Term Facility were used to pay a $136.3 million distribution to a subsidiary of Exelis on September 26, 2014. The Revolver is available for working capital, capital expenditures, and other general corporate purposes. In connection with the Credit Agreement, the Company paid $3.7 million in debt financing fees, which were capitalized as debt issuance costs and are included in Long-term debt issuance costs, net in the unaudited condensed consolidated balance sheets. The debt issuance costs are being amortized as an adjustment to Interest expense over the remaining life of the Credit Agreement.

Term Facility

The Term Facility consists of a five-year term loan in an aggregate principal amount of $140.0 million. The full amount of the term loan was made in a single drawing on September 26, 2014. As of March 27, 2015, the balance outstanding for the Term Facility was $137.4 million. The Term Facility amortizes in quarterly installments at the following rates per annum: 7.5% in year one; 10% in each of years two and three, 15% in year four and 57.5% in year five. Amounts borrowed under the Term Facility that are repaid or prepaid may not be re-borrowed. Any unpaid amounts must be repaid by September 17, 2019. In addition to the quarterly installments, the Company intends to prepay $5.0 million over the next twelve months.

Revolver

The Revolver consists of a five-year senior secured revolving credit facility with aggregate commitments in an amount equal to $75.0 million, of which up to $35.0 million is available for the issuance of letters of credit, and includes a swingline facility in an amount equal to $10.0 million. The Revolver will mature and the commitments thereunder will terminate on September 17, 2019. As of March 27, 2015, there were six letters of credit outstanding in the aggregate amount of $14.3 million, which reduced our borrowing availability to $60.7 million under the Revolver.

Guarantees and Collateral

The indebtedness, obligations and liabilities under the Senior Secured Credit Facilities are unconditionally guaranteed jointly and severally on a senior secured basis by Vectrus and certain of its current and future restricted subsidiaries and are secured, subject to permitted liens and other exceptions and exclusions, by a first-priority lien on substantially all tangible and intangible assets of Vectrus, VSC and each domestic guarantor including (i) a perfected pledge of all of the capital stock of VSC and each direct, wholly-owned material restricted subsidiary held by VSC or any guarantor (subject to certain limitations with respect to foreign subsidiaries) and (ii) perfected security interests in and mortgages on, accounts, inventory, equipment, general intangibles, commercial tort claims, investment property, intellectual property, material fee-owned real property, letter of credit rights, deposit and securities accounts, intercompany notes and proceeds of the foregoing, except for certain excluded assets.

Mandatory Prepayments

The Term Facility requires the following amounts to be applied to prepay the Term Loan, subject to certain thresholds, exceptions and reinvestment rights:


•	100% of the net cash proceeds from the incurrence of indebtedness by Vectrus and its restricted subsidiaries (other than permitted debt);


•	100% of the net cash proceeds of all non-ordinary course asset sales or other dispositions of property by Vectrus and its restricted subsidiaries (including casualty insurance and condemnation proceeds, but with exceptions for sales of inventory and other ordinary course dispositions, obsolete or worn-out property, property no longer useful in the business and other exceptions);


•	50% of excess cash flow with step-downs to 25% and 0% based on certain leverage ratios, commencing with fiscal year ending December 31, 2015. Any voluntary prepayments made by the Company that exceed the schedule payments for a specific year will be applied against the required step-down amount for that specific year.

Voluntary Prepayments

VSC may voluntarily prepay the Term Facility in whole or in part at any time without premium or penalty, subject to the payment of customary breakage costs, which we anticipate would be minimal, in the case of LIBOR rate loans as defined in the Credit Agreement. Optional prepayments of the Term Facility will be applied to the remaining installments thereof as directed by VSC.

Commitments under the Revolver may be reduced in whole or in part at any time without premium or penalty.

Covenants

The Senior Secured Credit Facilities contain certain covenants that, among other items, limit or restrict the ability of Vectrus and its restricted subsidiaries, including VSC, to (subject to certain qualifications and exceptions):


•	create liens and encumbrances;


•	incur additional indebtedness;


•	merge, dissolve, liquidate or consolidate;


•	make acquisitions, investments, advances or loans;


•	dispose of or transfer assets;


•	pay dividends or make other payments in respect of our capital stock;


•	amend certain material documents;


•	redeem or repurchase certain debt;


•	engage in certain transactions with affiliates;


•	enter into speculative hedging arrangements; and


•	enter into certain restrictive agreements.

As of March 27, 2015, the maximum amount of dividends the Company could distribute was $5.0 million. In addition, Vectrus is required to comply with (a) a maximum ratio of total consolidated indebtedness to consolidated Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) of 3.50 to 1.00, with step-downs to 3.00 to 1.00 beginning with the third fiscal quarter of 2015 and 2.75 to 1.00 beginning with the first fiscal quarter of 2016 and (b) a minimum ratio of consolidated EBITDA to consolidated interest expense (net of cash interest income) of 4.50 to 1.00. As of March 27, 2015, the Company had a total consolidated indebtedness to EBITDA of 3.02 to 1:00 and consolidated EBITDA to consolidated interest expense of 7.15 to 1:00. The Company was in compliance with all financial covenants related to the Senior Secured Credit Facilities as of March 27, 2015.

Interest Rates and Fees

Outstanding borrowings under the Senior Secured Credit Facilities accrue interest, at the option of VSC, at a per annum rate of (i) LIBOR plus the applicable margin or (ii) a base rate plus the applicable margin. The applicable margin for borrowings under the Senior Secured Credit Facilities is subject to a leverage-based pricing grid with the LIBOR rate ranging from 2.50% to 3.00%. The interest rate under the Senior Secured Credit Facilities at March 27, 2015 was 2.93%.

During an event of default, overdue principal under the Senior Secured Credit Facilities may bear interest at a rate of 2.00% in excess of the otherwise applicable rate of interest. On and after the funding date, VSC pays a commitment fee on the undrawn portion of the Revolver ranging from 0.40% to 0.50% depending on the leverage ratio.

The fair value of the Company's long-term debt approximates the carrying value as of March 27, 2015 because the term loan bears interest at a floating rate of interest. The fair value is based on observable inputs of interest rates that are currently available to the Company for debt with similar terms and maturities for non-public debt.

Carrying values and fair values of the Term Facility in the unaudited condensed consolidated balance sheets are as follows:



	March 27, 2015
(In thousands)	Carrying Amount		Fair Value
Long-term debt, including short term portion	$	137,375	$	137,375