Long-term Debt

Long-term debt consisted of the following at December 31:



(dollars in thousands)	2017			2016
Term loan	$	393,914		$	383,137
Less current maturities	(4,000		)	(3,960		)
Total long-term debt	$	389,914		$	379,177

New Credit Agreement

On May 25, 2017, the Company, as borrower, entered into a credit agreement (the “Credit Agreement”) with Citibank, N.A., as administrative agent, and a syndicate of financial institutions, as lenders and other agents. The Credit Agreement provides for a $120.0 million revolving facility (the “Revolving Facility”), of which up to $10.0 million is available for letters of credit, and for a $400.0 million term loan facility (the “Term Facility”). A majority of the proceeds of the Term Facility were used to refinance the Old Credit Agreement (as defined below).

All obligations under the Credit Agreement are guaranteed by each of the material wholly-owned domestic restricted subsidiaries of the Company, subject to certain exceptions. Substantially all of the assets of the Company and each guarantor, subject to customary exceptions, are pledged as collateral in support of all obligations under the Credit Agreement, and the guarantees of those obligations.

Pursuant to the Credit Agreement, $1.0 million of the Term Facility must be repaid each fiscal quarter commencing with the fiscal quarter of the Company ending September 30, 2017. Upon maturity on May 25, 2024, the remaining principal balance of $373.0 million will be due.

Interest under the Revolving Facility and the Term Facility is payable, at the Company’s option, either at a base rate (subject to a floor of 0.00% and based on the highest of the prime rate, the overnight federal funds rate plus 1/2 of 1.00% and the one-month LIBOR rate plus 1.00%) plus an applicable margin of 1.00% per annum or a LIBOR-based rate (subject to a floor of 0.00%) plus an applicable margin of 2.00% per annum. The interest payment dates of the loans are dependent on the duration of the interest periods for the types of loans selected by the Company and are set forth in the Credit Agreement. Such applicable margins will be reduced by 0.25%, in each case, if (i) the Company’s Consolidated First Lien Gross Leverage Ratio (as defined in the Credit Agreement) is less than or equal to 1.00 to 1.00 or (ii) the Company maintains credit rating equal to or higher than Baa3 from Moody’s and BBB- from S&P.

The Company’s Term Facility and Revolving Facility contain financial covenants, including a financial covenant to maintain, commencing on December 31, 2017, a Consolidated First Lien Net Leverage Ratio (“leverage ratio”), defined as, with certain adjustments, the ratio of (i) the Company’s net debt that is secured by certain liens on the collateral to (ii) consolidated net income before interest, taxes, depreciation and amortization for the most recently ended period of four consecutive fiscal quarters for which financial statements have been delivered, that does not exceed 4.00 to 1.00. The Credit Agreement also sets forth mandatory and optional prepayment conditions, including, commencing with the fiscal year ending on December 31, 2018, an annual excess cash flow requirement, as defined, that may result in our use of cash to reduce our debt obligations.

Termination of Old Credit Agreement

On May 25, 2017, in connection with the closing of the Credit Agreement, the Company repaid in full approximately $382.0 million of borrowings under the Credit Agreement, dated as of August 8, 2012, by and among Blue Pet Products, Inc., Blue Buffalo Company, Ltd., the lenders from time to time party thereto and Citibank, N.A as administrative agent (as amended from time to time, the “Old Credit Agreement”). The credit facilities and related agreements and documents under the Old Credit Agreement were terminated and amounts due and payable thereunder were repaid upon the effectiveness of the Credit Agreement.

Accounting Treatment

Based on management’s review of the Credit Agreement and the refinancing transaction, the accounting for debt extinguishment applied. As such, the costs incurred related to third parties and debt issuance of $4.4 million were treated as a direct deduction of the net carrying amount of the Term Facility. These costs will be amortized to interest expense using the effective interest method through the Term Facility’s maturity date of May 25, 2024. There were no direct costs categorized as payments to creditors related to the Term Facility.

Fees paid to creditors of $0.3 million related to the Revolving Facility. As the borrowing capacity of the Revolving Facility is greater than the borrowing capacity that existed under the Old Credit Agreement, these costs are deferred and will be amortized to interest expense using the effective interest method over the Revolving Facility’s term, maturing on May 25, 2022.

At December 31, 2017, we had a carrying value of $393.9 million of term loan borrowings (fair value of $395.4 million) at an effective interest rate of 3.72% and no outstanding borrowings under the Revolving Facility. At December 31, 2016, the Company had $383.1 million of term loan borrowings (fair value of $386.5 million) at an effective interest rate of 3.79% and no outstanding borrowings under the revolving credit facility.

During the years ended December 31, 2017, 2016, and 2015, the Company incurred total interest expense of $14.5 million, $15.0 million and $15.1 million. During the years ended December 31, 2017 and 2016 the Company capitalized $3.4 million and $0.4 million of interest expense, respectively, related to the expansion of our internal manufacturing capabilities. No interest expense was capitalized during the year ended December 31, 2015.

The Credit Agreement contains other customary terms, including (i) representations and warranties, (ii) affirmative covenants, (iii) negative covenants, including limitations on indebtedness, liens, mergers, acquisitions, asset sales, investments, distributions, prepayments of subordinated debt, and transactions with affiliates, in each case subject to baskets, thresholds and other exceptions, and a financial covenant to maintain a certain Consolidated First Lien Net Leverage Ratio as set forth in the Credit Agreement, and (iv) customary events of default. The Company believes it was in compliance with its financial debt covenants in the Credit Agreement as of December 31, 2017.