Debt

12 Months Ended

Dec. 31, 2022

Debt Disclosure [Abstract]

Debt

Debt

The table below sets forth the Company’s long-term debt as presented on the consolidated balance sheets for the years ended December 31, 2021 and 2022:

(in thousands)	December 31, 2021		December 31, 2022
Current portion of long-term debt
2015 First Lien Term Loan	$	6,461	$	—
Term Loans	—		7,500
Total current portion of long-term debt	$	6,461	$	7,500
Long-term debt
2015 First lien term loan, due June 19, 2024 (4.50% at December 31, 2021)	503,879		—
Term Loans, due November 29, 2027 (6.76% at December 31, 2022)	—		292,500
Revolving Credit Facility	—		205,494
Unamortized discount and debt issuance costs	(4,772)		(4,004)
Total long-term debt, net	$	499,107	$	493,990

2022 Credit Agreement

On November 29, 2022 (the “Closing Date”), Sterling Infosystems, Inc. (the “Borrower”), a Delaware corporation and a subsidiary of the Company, entered into a credit agreement (the “2022 Credit Agreement”) by and among the Borrower, as borrower, Sterling Intermediate Corp., KeyBank National Association, as administrative agent (the “Administrative Agent”), certain guarantors party thereto (the “Guarantors”) and the lenders party thereto.

The 2022 Credit Agreement provides for aggregate principal borrowings of $700.0 million, comprised of $300.0 million aggregate principal amount of term loans (the “Term Loans”) and a $400.0 million revolving credit facility (the “Revolving Credit Facility”). The Term Loans and the Revolving Credit Facility mature on November 29, 2027.

Amounts outstanding under the 2022 Credit Agreement bear interest under either of the following two rates, elected in advance by the Borrower: (1) a base rate (equal to the greatest of (a) the prime rate, (b) the federal funds rate plus 1⁄2 of 1% and (c) the one-month adjusted term Secured Overnight Financing Rate (“SOFR”) rate plus 1%); or (2) an adjusted term SOFR rate (equal to the sum of (a) term SOFR plus (b) 0.10%), in each case, plus a tiered floating interest rate margin based on the net leverage ratio of the Borrower. Interest on adjusted term SOFR borrowings is payable on the last business day of the one, three or six-month interest period selected by the Borrower (except in the case of a six-month election, in which case it is payable on the last business day of the third and sixth month). Interest on base rate borrowings is payable on the last business day of each quarter. The applicable interest rate at December 31, 2022 was 6.76%.

The Borrower will pay a quarterly unused commitment fee at a rate per annum ranging from 0.20% to 0.30%, on the unused portion of the Revolving Credit Facility based on the net leverage ratio of the Borrower and its subsidiaries. The Borrower can use available funding capacity under the Revolving Credit Facility to issue letters of credit, subject to a sublimit equal to the lesser of $40.0 million and amounts available for borrowing under the Revolving Credit Facility. As of December 31, 2022, there were $0.7 million of letters of credit issued under the 2022 Credit Agreement to support two office leases and additional capacity for letters of credit of $39.3 million.

The Term Loans amortize quarterly in the following amounts: $1.875 million per quarter (for the first four full quarters ending after the Closing Date), $3.750 million per quarter (for the next eight quarters) and $5.625 million per quarter (for the next seven quarters).

The 2022 Credit Agreement contains covenants that, among other things, restrict the Borrower’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 2022 Credit Agreement also contains financial covenants that require the Borrower to comply with (a) a maximum net leverage ratio of 4.00:1.00 (which may be increased to 4.50:1.00 for four quarters if the Borrower and its subsidiaries consummate acquisitions during any 6-month period for which the total aggregate cash consideration is greater than or equal to $75.0 million) and (b) a minimum interest coverage ratio of 3.00:1.00. Both financial covenants are tested quarterly.

The Company was in compliance with all financial covenants under the 2022 Credit Agreement as of December 31, 2022.

The Term Loans and the Revolving Credit Facility (and related revolving borrowings) are guaranteed by Parent and all material wholly owned domestic subsidiaries of the Borrower. Obligations under the 2022 Credit Agreement are collateralized by a first lien on substantially all the assets and outstanding capital stock of the Borrower and its material domestic subsidiaries, subject to certain exceptions. The 2022 Credit Agreement also contains various events of default, 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 therein to be true and certain insolvency events. If an event of default occurs and is continuing, the principal amounts outstanding under the 2022 Credit Agreement, together with all accrued and unpaid interest and other amounts owed thereunder, may be declared immediately due and payable by the lenders.

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. See Note 21, “Condensed Financial Information of Registrant (Parent Company Only)” for additional information.

Goldman Sachs Lending Partners LLC, an affiliate of the owners of a majority of the Company’s common stock, is a Co-Documentation Agent and lender under the 2022 Credit Agreement and received $0.1 million fees in connection therewith.

Future principal payments by year of the Company’s long-term debt under the 2022 Credit Agreement as of December 31, 2022 are as follows:

(in thousands)
2023	$	7,500
2024	15,000
2025	15,000
2026	22,500
2027	445,494
	$	505,494

The net proceeds of the Term Loans, together with borrowings of approximately $223.0 million under the Revolving Credit Facility, were used to repay all outstanding indebtedness, including accrued and unpaid interest, in an aggregate amount of approximately $513.9 million, under our 2015 Credit Agreement, by and among the Borrower, as borrower, the guarantors party thereto, KeyBank National Association, as administrative agent, and the lenders party thereto, and to pay related fees and expenses. For the year ended December 31, 2022, the Company recognized a loss on extinguishment of debt in the amount of $3.7 million resulting from the credit agreement refinancing on November 29, 2022.

The estimated fair value of the Company’s 2022 Credit Agreement was $487.1 million as of December 31, 2022. This fair value was 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 2022 Credit Agreement or similar liabilities is not readily available.

2015 Credit Agreement

The 2015 Credit Agreement provided for aggregate principal borrowings of $740.0 million, comprised of a $655.0 million term loan (the “2015 First Lien Term Loan”) and an $85.0 million revolving credit facility (the “2015 Revolving Credit Facility”). On August 11, 2021, the Company entered into the Sixth Amendment to the 2015 First Lien Credit Agreement (the “Sixth Amendment”). Pursuant to the Sixth Amendment, the aggregate amount of borrowings permitted by the 2015 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 2015 First Lien Term Loan bore interest using either of the following two options which were 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 was subject to a 1% floor. The Company had the ability to choose the method of interest for a period of either one month, two months, three months or six months. Interest was payable on the last business day of the period selected except for the six-month period, where it was payable on the last day of the third and sixth month. As of December 31, 2021, borrowings under the 2015 First Lien Term Loan bore interest at 4.50%.

The 2015 First Lien Term Loan required a $1.6 million repayment of principal on the last business day of each March, June, September and December. Per the 2015 Credit Agreement, the Company was required to make a mandatory principal prepayment to the extent the Company had 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 2015 First Lien Term Loan, there was 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 2015 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 was due at maturity on June 19, 2024.

Outstanding borrowings under the 2015 Credit Agreement were collateralized by a first-priority security interest in substantially all of the equity interests of the Company.

Pursuant to the Sixth Amendment, the aggregate amount of borrowings permitted by the 2015 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 bore interest at a tiered floating interest rate based on the net leverage ratio of the borrower. The rate could 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 was 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 2015 Revolving Credit Facility, net of Letters of Credit (as defined below), were $139.3 million as of December 31, 2021. The 2015 Revolving Credit Facility was to mature on the earlier of August 11, 2026 and December 31, 2023 unless, on or prior to December 31, 2023, the 2015 First Lien Term Loan had 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 2015 First Lien Term Loan was no earlier than February 11, 2027.

For the year ended December 31, 2021, $0.7 million of stand-by letters of credit (“Letters of Credit”) were issued under the 2015 Revolving Credit Facility to support two office space leases. The 2015 Revolving Credit Facility had 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 2015 Revolving Credit Facility. As of December 31, 2021, the 2015 Revolving Credit Facility provided additional capacity for Letters of Credit of $19.3 million.

The Company’s 2015 Credit Agreement contained financial covenants and covenants that, among other things, restricted 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 2015 First Lien Term Loan Agreement. See Note 21, “Condensed Financial Information of Registrant (Parent Company Only)” for additional information. The financial covenants also required that the Company remain within a specified leverage ratio of 6.75:1.00 once it drew down on 35% or more of the 2015 Revolving Credit Facility.

Obligations under the Company’s 2015 Credit Agreement were collateralized by a first lien on substantially all of the assets and outstanding capital stock of the Company subject to exceptions. The Company’s 2015 Credit Agreement also contained 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 was to occur and continue, the principal amounts outstanding thereunder, together with all accrued and unpaid interest and other amounts owed thereunder, could be declared immediately due and payable by the lenders.

The estimated fair value of the Company’s 2015 First Lien Term Loan was $508.4 million as of December 31, 2021. This fair value was 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 2015 First Lien Term Loan or similar liabilities is not readily available.