Debt

12 Months Ended

Dec. 31, 2021

Debt Disclosure [Abstract]

Debt

Debt

The table below sets forth the Company’s long-term debt as presented in the consolidated balance sheets for the years ended December 31, 2020 and 2021:

(in thousands)	December 31, 2020		December 31, 2021
Current portion of long-term debt
First lien term loan	$	13,147	$	6,461
Long-term debt
First lien term loan, due June 19, 2024
(4.64% and 4.50% for the 12 months ended Dec 31, 2020 and
2021, respectively)	610,340		503,879
Unamortized discount and debt issuance costs on first lien term loan	(8,034)		(4,772)
Total long-term debt, net	$	602,306	$	499,107

First Lien Term Loan

The First Lien Credit Agreement, as amended (the “Credit Agreement”) provided for aggregate principal borrowings of $740.0 million, comprised of a $655.0 million term loan (the “First Lien Term Loan”) and an $85.0 million revolving credit facility (the “Revolving Credit Facility”). On August 11, 2021, the Company entered into

the Sixth Amendment to the First Lien Credit Agreement (the “Sixth Amendment”). Pursuant to the Sixth Amendment, the aggregate amount of borrowings permitted by the Revolving Credit Facility automatically increased from $85.0 million to $140.0 million upon the consummation of the IPO and thus, the aggregate principal borrowings allowed under the Credit Agreement increased to $795.0 million.

Amounts outstanding under the First Lien Term Loan bear interest using either of the following two options which are chosen quarterly in advance at the election of the borrower: (1) an applicable rate of 2.5% plus the greater of (a) the prime rate or (b) the federal funds rate plus ½ of 1% or (c) the one-month London Interbank Offered Rate (“LIBOR”) plus 1%, or (d) a 2% floor; (2) an applicable rate of 3.5% plus one-month LIBOR which is subject to a 1% floor. The Company chooses the method of interest for a period of either one month, two months, three months or six months. Interest is payable on the last business day of the period selected except for the six-month period, where it is payable on the last day of the third and sixth month.

The First Lien Term Loan requires a $1.6 million repayment of principal on the last business day of each March, June, September and December. Per the Credit Agreement, the Company must make a mandatory principal prepayment to the extent the Company has excess cash flow, as defined by the agreement, in any completed fiscal year. For the year ended December 31, 2020, the mandatory principal prepayment was $6.7 million and was paid in April 2021. Per the terms of the First Lien Term Loan, there is no mandatory principal prepayment required for the year ended December 31, 2021. On November 1, 2021, the Company utilized proceeds from the IPO and cash on hand to repay $100.0 million of outstanding borrowings under the First Lien Term Loan. Additionally, in conjunction with principal repayment, the Company recognized the write-down of debt discount of $1.0 million. Other than the required quarterly repayments, all outstanding principal is due at maturity on June 19, 2024.

Outstanding borrowings under the Credit Agreement are collateralized by a first-priority security interest in substantially all of the equity interests of the Company.

Revolving Credit Facility

Pursuant to the Sixth Amendment, the aggregate amount of borrowings permitted by the Revolving Credit Facility automatically increased from $85.0 million to $140.0 million upon the consummation of the IPO on September 23, 2021.

Amounts outstanding under the Revolving Credit Facility bear interest at a tiered floating interest rate based on the net leverage ratio of the borrower. The rate may be chosen monthly in advance at the election of the borrower, as follows: (1) an applicable rate of 2.5% plus the greater of (a) the prime rate (b) the federal funds rate plus ½ of 1% (c) the one-month LIBOR plus 1% or (d) a 2% floor or (2) an applicable rate of 3.5% plus one-month LIBOR. In addition, there is a quarterly fee of 0.50% or 0.375% on the unused portion of the commitments based on the first lien net leverage ratio. Unused and therefore available borrowings under the Revolving Credit Facility, net of Letters of Credit (as defined below), were $84.0 million and $139.3 million as of December 31, 2020 and 2021, respectively. The Revolving Credit Facility matures on the earlier of August 11, 2026 and December 31, 2023 unless, on or prior to December 31, 2023, the First Lien Term Loan has been refinanced with a final maturity date that is no earlier than February 11, 2027 or amended, modified or waived, such that the final maturity date of the First Lien Term Loan is no earlier than February 11, 2027.

Letters of Credit

For the years ended December 31, 2020 and 2021, $1.0 million and $0.7 million, respectively, of stand-by letters of credit (“Letters of Credit”) were issued under the Revolving Credit Facility to support two office space leases. The Revolving Credit Facility has a sublimit for Letters of Credit equal to the lesser of $20.0 million or the aggregate amount of the revolving credit commitments under the Revolving Credit Facility. As of December 31, 2020 and 2021, the Revolving Credit Facility provided additional capacity for Letters of Credit of $19.0 million and $19.3 million, respectively.

The Company’s Credit Agreement contains financial covenants and covenants that, among other things, restrict the Company’s ability to: incur certain additional indebtedness; transfer money between its various subsidiaries; pay dividends on, repurchase or make distributions with respect to its subsidiaries’ capital stock or make other restricted payments; issue stock of subsidiaries; make certain investments, loans or advances; transfer and sell certain assets; create or permit liens on assets; consolidate, merge, sell or otherwise dispose of all or substantially all of its assets; enter into certain transactions with its affiliates; and amend certain documents. The restricted net assets (as such term is used in Rule 4-08(e)(3) of Regulation S-X) of the subsidiaries of Sterling Check Corp. as parent company (the “Parent”) exceed 25% of the consolidated net assets of the Parent. The ability of the Parent’s operating subsidiaries to pay dividends may be restricted due to

the terms of the subsidiaries’ First Lien Term Loan Agreement. See Note 20, “Condensed Financial Information of Registrant (Parent Company Only)” for additional information. The financial covenants also require that the Company remains within a specified leverage ratio of 6.75:1.00 once it draws down on 35% or more of the Revolving Credit Facility. The Company was in compliance with all financial covenants under the Credit Agreement as of December 31, 2021.

Obligations under the Company’s Credit Agreement are collateralized by a first lien on substantially all of the assets and outstanding capital stock of the Company subject to exceptions. The Company’s Credit Agreement also contains various events of default with respect to the indebtedness, including, without limitation, the failure to pay interest or principal when the same is due, cross default and cross acceleration provisions, the failure of representations and warranties contained in the agreements to be true and certain insolvency events. If an event of default occurs and is continuing, the principal amounts outstanding thereunder, together with all accrued and unpaid interest and other amounts owed thereunder, may be declared immediately due and payable by the lenders.

The estimated fair value of the Company’s First Lien Term Loan was $609.5 million and $508.4 million as of December 31, 2020 and December 31, 2021, respectively. These fair values were determined based on quoted prices in markets with similar instruments that are less active (Level 2 inputs as defined below) as an observable price of the First Lien Term Loan or similar liabilities is not readily available.

Future principal payments by year of the Company’s long-term debt as of December 31, 2021 are as follows:

(in thousands)
2022	$	6,461
2023	6,461
2024	497,418
	$	510,340