Financing Arrangements

9 Months Ended

Feb. 29, 2012

Financing Arrangements

Financing Arrangements

Note 7 — Financing Arrangements

A summary of our recourse and non-recourse debt is as follows:

	February 29,			May 31,
	2012			2011
Recourse debt:
Revolving credit facility expiring April 12, 2016 with interest payable monthly (see Note 8)	$	300,000		$	100,000
Revolving credit facility (secured by aircraft and related engines and components) due April 23, 2015 with floating interest rate, payable monthly	60,504			54,940
Revolving credit facility expiring March 9, 2012 with interest payable monthly	1,589			—
Note payable due July 19, 2012 with interest at 7.22%, payable monthly	8,907			2,217
Mortgage loan (secured by Wood Dale, Illinois facility) due August 1, 2015 with interest at 5.01%	11,000			11,000
Notes payable due January 15, 2022 with interest at 7.25% payable semi-annually on January 15 and July 15	171,986			—
Convertible notes payable due March 1, 2014 with interest at 1.625% payable semi-annually on March 1 and September 1	76,170			73,418
Convertible notes payable due March 1, 2016 with interest at 2.25% payable semi-annually on March 1 and September 1	53,090			51,309
Convertible notes payable due February 1, 2026 with interest at 1.75% payable semi-annually on February 1 and August 1	112,736			107,420
Industrial revenue bond (secured by trust indenture on property, plant and equipment) due August 1, 2018 with floating interest rate, payable monthly	25,000			25,000
Total recourse debt	820,982			425,304
Current maturities of recourse debt	(221,661		)	(111,323		)
Long-term recourse debt	$	599,321		$	313,981
Non-recourse debt:
Non-recourse note payable due December 8, 2011 with interest at 13.0%	$	—		$	—
Non-recourse note payable due July 19, 2012 with interest at 7.22%	—			8,201
Non-recourse note payable due April 3, 2015 with interest at 8.38%	—			3,654
Total non-recourse debt	—			11,855
Current maturities of non-recourse debt	—			(823		)
Long-term non-recourse debt	$	—		$	11,032

On January 23, 2012 we completed an offering of $175,000 aggregate principal amount of 7.25% Senior Notes due 2022 (the “Notes”).  The Notes were sold to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States to non-U.S. persons in accordance with Regulation S under the Securities Act.  The Notes were sold at a price equal to 98.268% if the principal amount thereof, for a yield to maturity of 7.5%.  The net proceeds of the offering of the Notes were used to repay a portion of the borrowings under our revolving credit agreement incurred to fund our December 2011 acquisition of Telair® International GmbH and Nordisk Aviation Products AS from Teleflex Incorporated.

The Notes are governed by an Indenture dated as of January 23, 2012 (the “Indenture”) by and among AAR, certain subsidiary guarantors identified therein (the “Guarantors”) and U.S. Bank National Association, as trustee.

The Notes bear interest at a rate of 7.25% per year, payable semi-annually, in cash in arrears, on January 15 and July 15 of each year, commencing July 15, 2012.  The Notes will mature on January 15, 2022.  Prior to January 15, 2015, AAR may redeem up to 35% of the aggregate principal amount of the Notes with the net cash proceeds of certain equity offerings at a redemption price of 107.25% of the principal amount thereof, plus accrued and unpaid interest and additional interest, if any, to the redemption date.  At any time prior to January 15, 2017, AAR may redeem the Notes, in whole or in part, at a redemption price equal to 100% of the principal amount of the Notes redeemed, plus a make-whole premium, plus any accrued and unpaid interest and additional interest, if any, to the redemption date.  AAR may redeem the Notes at its option, in whole or in part, at any time on or after January 15, 2017, upon not less than 30 nor more than 60 days’ notice at the redemption prices (expressed as percentages of the principal amount to be redeemed) set forth below, plus any accrued and unpaid interest and additional interest, if any, to the redemption date if redeemed during the 12-month period beginning on January 15 of the years indicated below:

Year	Redemption Price
2017	103.625	%
2018	102.417	%
2019	101.208	%
2020 and thereafter	100.000	%

The Notes are unconditionally guaranteed, on a full, joint and several basis, by each of the Guarantors, which consist of all of our existing domestic subsidiaries.  The Notes and the guarantees are general unsecured senior obligations of AAR and the Guarantors, respectively, rank equally in right of payment with all existing and future senior debt of AAR and the Guarantors, as applicable, and are senior in right of payment to all future subordinated obligations of AAR or the Guarantors.  The Notes and the guarantees are effectively subordinated to secured debt of AAR and the Guarantors, respectively, to the extent of the value of the assets securing that debt.  In addition, the Notes are structurally junior to any debt or other liabilities of our nonguarantor subsidiaries.

The Indenture contains covenants that, amount other things, limit AAR’s and its Restricted Subsidiaries’ (as defined in the Indenture) abilities to (i) incur additional debt or sell preferred stock, (ii) pay dividends, redeem or repurchase stock or make other distributions, (iii) make certain investments, (iv) make other restricted payments and investments, (v) agree to or allow to exist restrictions on the ability to pay dividends or make other payments on its capital interests, (vi) create liens without granting equal and ratable liens to the holders of the Notes, (vii) enter into sale and leaseback transactions, (viii) merge, consolidate or transfer or dispose of substantially all of their assets, (ix) enter into certain types of transactions with affiliates and (x) sell assets.  These covenants are subject to a number of qualifications and limitations.  In addition, the Indenture limits AAR’s and the Restricted Subsidiaries’ abilities to engage in businesses other than businesses in which such companies are engaged on the date of issuance of the Notes and related businesses.

On April 12, 2011, we entered into an agreement with various financial institutions, as lenders and Bank of America, N.A., as administrative agent for the lenders (as amended, the “Credit Agreement”) providing for an unsecured revolving credit facility that we can draw upon for general corporate purposes.  The revolving commitment was originally $400,000 and on October 13, 2011 was increased to $580,000.  Under certain circumstances, we may request an increase to the revolving commitment by an aggregate amount of up to $100,000, not to exceed $680,000 in total.  The Credit Agreement expires on April 12, 2016.  Borrowings under the Credit Agreement bear interest at the offered Eurodollar Rate (defined as the British Bankers Association LIBOR Rate) plus 125 to 225 basis points based on certain financial measurements if a Eurodollar Rate loan, or at the offered fluctuating Base Rate plus 25 to 125 basis points based on certain financial measurements if a Base Rate loan.

During the second quarter of fiscal 2012, we sold an aircraft and the associated non-recourse debt of $3,252, which was due April 3, 2015, was assumed by the purchaser.  Also during the second quarter of fiscal 2012, we purchased our joint venture partner’s interest in a narrow-body aircraft.  In connection with this acquisition, we assumed $6,545 of non-recourse debt, which was paid in full on December 8, 2011.

During the first quarter of fiscal 2012, the non-recourse note due July 19, 2012 became fully recourse to the Company and is presented in the recourse portion of the table above.

During the nine-month period ended February 28, 2011, we repurchased $6,000 par value of our 2.25% convertible notes due March 1, 2016.  The notes were repurchased for $4,667 cash, and the gain of $97, after consideration of unamortized discount and debt issuance costs, is recorded in Gain on extinguishment of debt on the condensed consolidated statements of income.

At February 29, 2012, the face value of our long-term recourse debt was $628,720 and the estimated fair value was approximately $627,000.  The fair value of the Company’s long-term recourse debt is classified as Level 2 in the fair value hierarchy.  Level 2 refers to fair values estimated using significant other observable inputs including quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Convertible Notes

On June 1, 2009, we adopted a new accounting standard that clarifies the accounting for convertible debt instruments that may be settled wholly or partly in cash when converted, and requires convertible debt to be accounted for as two components: (i) a debt component which is recorded upon issuance at the estimated fair value of a similar straight-debt instrument without the debt-for-equity conversion feature; and (ii) an equity component that is included in capital surplus and represents the estimated fair value of the conversion feature at issuance.  The bifurcation of the debt and equity components results in a discounted carrying value of the debt component compared to the principal amount.  The discount is accreted to the carrying value of the debt component through interest expense over the expected life of the debt using the effective interest method.

As of February 29, 2012 and May 31, 2011, the long-term debt and equity component (recorded in capital surplus, net of income tax benefit) consisted of the following:

	February 29,			May 31,
	2012			2011
Long-term debt:
Principal amount	$	268,380		$	268,380
Unamortized discount	(26,384		)	(36,233		)
Net carrying amount	$	241,996		$	232,147
Equity component, net of tax	$	74,966		$	74,966

The discount on the liability component of long-term debt is being amortized using the effective interest method based on an effective rate of 8.48% for our 1.75% convertible notes; 6.82% for our 1.625% convertible notes and 7.41% for our 2.25% convertible notes.  For our 1.75% convertible notes, the discount is being amortized through February 1, 2013, which is the first put date for those notes.  For our 1.625% and 2.25% convertible notes, the discount is being amortized through their respective maturity dates of March 1, 2014 and March 1, 2016.

As of February 29, 2012 and February 28, 2011, for each of our convertible note issuances, the “if converted” value does not exceed its principal amount.

The interest expense associated with the convertible notes was as follows:

	Three Months Ended				Nine Months Ended
	February 29/28,				February 29/28,
	2012		2011		2012		2011
Coupon interest	$	1,229	$	1,229	$	3,685	$	3,704
Amortization of deferred financing fees	189		189		565		566
Amortization of discount	3,346		3,098		9,848		9,149
Interest expense related to convertible notes	$	4,764	$	4,516	$	14,098	$	13,419

Subsequent Event

On March 9, 2012, we entered into a five (5) year full amortization term loan agreement with Development Bank of Japan Inc. (the “Loan Agreement”) under which we intend to borrow $50,000 on an unsecured basis to refinance indebtedness incurred to finance the acquisition of Telair and Nordisk.  Borrowings under the Loan Agreement bear interest at the offered Eurodollar Rate (defined as the British Bankers Association LIBOR Rate) plus 250 basis points.

The Loan Agreement in part requires us to comply with certain financial covenants which are consistent with our Credit Agreement.  The Loan Agreement is not guaranteed by the Company’s subsidiaries. The Loan Agreement also contains certain affirmative and negative covenants, including those relating to financial reporting and notification, payment of indebtedness, taxes and other obligations, compliance with applicable laws, and limitations on additional liens, indebtedness, acquisitions, investments and disposition of assets.