Debt

12 Months Ended

Dec. 31, 2023

Debt Disclosure [Abstract]

Debt

Debt

On November 29, 2022, 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 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 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, 2023, 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 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.

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 assessed quarterly.

The Company was in compliance with all financial covenants under the 2022 Credit Agreement as of December 31, 2023.

The table below sets forth the Company’s long-term debt as presented in the consolidated balance sheets for the periods presented:

(in thousands)	December 31, 2023		December 31, 2022
Current portion of long-term debt
Term Loans	$	15,000	$	7,500
Total current portion of long-term debt	$	15,000	$	7,500
Long-term debt
Term Loans, due November 29, 2027 (interest rates of 7.71% and 6.76% at December 31, 2023 and 2022, respectively)	$	277,500	$	292,500
Revolving Credit Facility(1)	205,494		205,494
Unamortized discount and debt issuance costs	(3,206)		(4,004)
Total long-term debt, net	$	479,788	$	493,990

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(1)As of December 31, 2023, there was $194.5 million of available capacity under the Revolving Credit Facility.

Future principal payments by year of the Company’s long-term debt under the 2022 Credit Agreement as of December 31, 2023 are as follows:

(in thousands)
2024	$	15,000
2025	15,000
2026	22,500
2027	445,494
	$	497,994

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 former credit agreement. 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 $484.1 million and $487.1 million as of December 31, 2023 and 2022, 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 2022 Credit Agreement or similar liabilities is not readily available.