Note 5. Long-Term Debt and Other Financial Instruments

9 Months Ended

Sep. 23, 2012

Long Term Debt Financial Instruments And Derivatives [Text Block]

5.             In May of 2012, the Company consummated a financing arrangement with BH Finance LLC, an affiliate of Berkshire Hathaway, that provides the Company with a $400 million term loan and a $45 million revolving credit line.  The funding of the new financing arrangement’s term loan and an initial draw of the revolving credit facility resulted in cash proceeds to the Company of $382.5 million, which were immediately used to fully repay all amounts outstanding under the Company’s existing credit facility, pay fees and expenses related to the financing and to fund working capital requirements.  The new loan was issued at a discount of 11.5% and was secured pari passu with the Company’s existing 11.75% senior secured notes due 2017.   The new term loan has an interest rate of 10.5%, which could step down to 9% if total leverage were to reach 3.50x.  While the new financing arrangement does not contain financial covenants, there are restrictions, in whole or in part, on certain activities including the incurrence of additional debt, repurchase of shares, and the payment of dividends.  The term loan may be voluntarily repaid prior to maturity, in whole or in part, at a price equal to 100% of the principal amount repaid plus accrued and unpaid interest, plus a premium, which starts at 14.5% and steps down over time, as set forth in the agreement.  Other factors, such as the sale of assets may result in a mandatory prepayment or an offer to prepay a portion of the term loan without premium or penalty.  The Company considers the prepayment feature to be an embedded derivative which it has bifurcated from the term loan.  The new term loan and revolving credit facility will mature in May 2020 and is guaranteed by the Company’s subsidiaries.  The revolving credit line bears interest at a rate of 10% and is subject to a 2% commitment fee.

Concurrent with the funding of the financing arrangement and pursuant to a Warrant Agreement entered into in May of 2012, the Company issued warrants to Berkshire Hathaway to purchase 4.6 million shares of Class A common stock, which represented approximately 19.9% of the number of then outstanding shares of the Company’s common stock.  On September 24, 2012, Berkshire Hathaway exercised all of the warrants to purchase 4,646,220 shares of Class A common stock, par value $5.00 per share, for an aggregate purchase price of $46,462.20, or $0.01 per share.  

On June 25, 2012, the Company completed the sale of its newspapers to World Media Enterprises (a subsidiary of Berkshire Hathaway) for $142 million in cash, subject to normal adjustments.  The Company immediately used the net proceeds from the newspaper sale to repay $53 million on the term loan at par and the $18.5 million balance on its then existing revolver.  The Company offered to purchase up to $45 million of its 11.75% senior notes due 2017 in a tender offer with only $200,000 of acceptances received.  The Company then offered and Berkshire Hathaway accepted repayment of $45 million on the term loan at par representing the amount the noteholders elected not to take.

The early repayment of debt resulted in debt modification and extinguishment costs of $17.3 million in the third quarter due to the accelerated recognition of a pro rata portion of discounts and deferred issuance costs.  In the second quarter of 2012, in conjunction with the secured financing with Berkshire Hathaway and the repayment of the previous credit facility the Company recorded debt modification and extinguishment costs of $7.7 million, primarily due to the write-off of unamortized fees related to the former credit agreement.  In addition, the Company capitalized $11.5 million of advisory and legal fees related to the new financing; these fees will be amortized as interest expense over the term of the financing arrangement.  In March of 2012, the Company amended its previous bank credit agreement which resulted in a $10.4 million of expense for debt modification and extinguishment costs including certain advisory, arrangement, and legal fees related to that refinancing. 

The previous bank credit facility had an interest rate of LIBOR (with a 1.5% floor) plus a margin of 7% and commitment fees of 2.5%.  In addition to this cash interest, the Company accrued payment-in-kind (PIK) interest of 1.5%.  PIK interest increased the bank term loan by nearly $1 million between March and May 2012 and was paid in cash upon repayment of the entire facility.

Following these transactions, as of September 23, 2012, the Company had in place a term loan with a face value of $302 million and a revolving credit facility with no outstanding balance and maximum availability of $45 million. Also outstanding were 11.75% senior notes with a face value of $300 million.  The term loan with Berkshire Hathaway matures in May 2020 and bears an interest rate of 10.5%, but could decrease to 9% based on the Company’s leverage ratio, as defined in the agreement.  The Company was in compliance with all provisions of both agreements at September 23, 2012. The chart below summarizes the carrying value of long-term debt at September 23, 2012:

	Sept. 23, 2012
(In thousands)	Carrying Amount
Term loan:
Face value	$	301,537
Remaining original issue discount		(33,219	)
Remaining warrant discount		(12,448	)
Embedded derivative liability		115
Remaining embedded derivative discount		(110	)
Carrying value		255,875
Revolving credit facility ($45 million remaining availability)		-
Senior notes:
Face value		299,800
Remaining original issue discount		(4,352	)
Carrying value		295,448
Capital lease liability		14
Total carrying value	$	551,337

In the third quarter of 2011, the Company’s last remaining interest rate swaps matured.  Interest rate swaps were carried at fair value based on the present value of the estimated cash flows the Company would have received or paid to terminate the swaps; the Company applied a discount rate that was predicated on quoted LIBOR prices and current market spreads for unsecured borrowings.  In the first nine months of 2011, $7.3 million was reclassified from Other Comprehensive Income (OCI) into interest expense on the Consolidated Condensed Statement of Operations as the effective portion of the interest rate swap.  The pretax change deferred in OCI in the first nine months of 2011 was $6.9 million.

The following table includes information about the carrying values and estimated fair values of the Company’s financial instruments at September 23, 2012 and December 25, 2011:

	Sept. 23, 2012				December 25, 2011
(In thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets:
Investments
Trading	$	193	$	193	$	205	$	205
Liabilities:
Long-term debt:
Revolving credit facility ($45 million available at 9/23/2012)		-		-		-		-
Term loan (including embedded derivative)		255,875		327,135		363,126		340,639
11.75% senior notes		295,448		346,269		294,919		285,000
Stockholders' Equity (Deficit):
Common stock warrants		16,912		23,649		-		-

Trading securities held by the Supplemental 401(k) Plan are carried at fair value and are determined by reference to quoted market prices.  At September 23, 2012, the fair value of the term loan was determined using a discounted cash flow analysis and an estimate of the current borrowing rate.  At December 25, 2011, the fair value of the bank term loan debt was estimated using discounted cash flow analyses and a current borrowing rate.  The fair value of the 11.75% senior notes was valued by reference to the most recent trade prior to the end of the applicable period.  The fair value of the common stock warrants at September 23, 2012, was determined by reference to a Black-Scholes model.  Under the fair value hierarchy, the Company’s trading securities fall under Level 1 (quoted prices in active markets), its senior notes, its common stock warrants, and it term loan that existed at December 25,  2011, fall under Level 2 (other observable inputs).  Its term loan at September 23, 2012, falls under Level 3 (unobservable inputs).