Debt

6 Months Ended

Jul. 02, 2011

Debt [Abstract]

Debt

Note 14—Debt

Debt was as follows:

	July 2, 2011		January 1, 2011		July 3, 2010
Short-term debt:
Current portion of 2011 Term Loan	$	2,000	$	—	$	—
CKJEA notes payable and Other		8,909		18,802		39,881
2008 Credit Agreements		—		—		25,322
Premium on interest rate cap -current		1,764		—		—
Italian Note		—		13,370		—
		12,673		32,172		65,203
Long-term debt:
2011 Term Loan		198,000		—		—
Premium on interest rate cap		12,631		—		—
		210,631		—		—
Total Debt	$	223,304	$	32,172	$	65,203

2011 Term Loan Agreement

On June 17, 2011, Warnaco Group, Warnaco, Calvin Klein Jeanswear Company (“CK Jeans”), an indirect wholly-owned subsidiary of Warnaco Group, and Warnaco Swimwear Products Inc. (“Warnaco Swimwear”), an indirect wholly-owned subsidiary of Warnaco Group, entered into a term loan agreement (the “2011 Term Loan Agreement”) with the financial institutions which are the lenders thereunder (the “Lenders”). Warnaco, CK Jeans and Warnaco Swimwear are co-borrowers on a joint and several basis under the 2011 Term Loan Agreement (the “Borrowers”).

The 2011 Term Loan Agreement provides for a $200,000 senior secured term loan facility, maturing on June 17, 2018 (the “2011 Term Loan”). In addition, during the term of the 2011 Term Loan Agreement, the Borrowers may request additional credit commitments for incremental term loan facilities in an aggregate amount not to exceed $100,000 plus the aggregate principal amount of the term loans that the Borrowers have voluntarily prepaid prior to the date of such request. The Borrowers may request a greater amount to the extent that Warnaco Group meets certain financial tests set forth in the 2011 Term Loan Agreement. At July 2, 2011, there was $200,000 in term loans outstanding under the 2011 Term Loan Agreement. During the Three Months Ended July 2, 2011, the Company repaid the outstanding balances of the 2008 Credit Agreements and the Italian Note (as defined below) from the proceeds of the 2011 Term Loan (see below). The Company paid $4,779 in deferred financing costs in connection with the 2011 Term Loan, which will be amortized to interest expense over the term of the loan using the effective interest method. The deferred financing costs were recorded in Other assets on the Consolidated Condensed Balance Sheet.

On each of the Company’s fiscal quarters, beginning on September 30, 2011, $500 of the outstanding principal amount of the 2011 Term Loans must be repaid. Such amount will be reduced if a portion of the principal amount is prepaid. The remaining principal amount is due on June 17, 2018.

The 2011 Term Loan Agreement provides interest rate options, at the Borrowers’ election, including a base rate, as defined in the 2011 Term Loan Agreement or at LIBOR (with a floor of 1.00%) plus a margin of 2.75%, in each case, on a per annum basis. Accrued interest will be paid in arrears on the last day of each interest period through the maturity date. Payment dates are the last calendar day (or business day if the last calendar day is not a business day) of each of January, April, July and October, beginning on October 31, 2011. Reset dates are two business days prior to a payment date, beginning on October 29, 2011 (determines the three-month LIBOR variable leg for the following three month period). From inception of the loan through July 29, 2011, the Company elected to use a combination of a base rate and a LIBOR rate of interest, each on a portion of the outstanding balance. At July 2, 2011, the loans under the 2011 Term Loan Agreement had a weighted average annual interest rate of 4.50% (comprised of $80,000 at 3.75% and $120,000 at a base rate of 5.0%). In order to match the interest rate on the hedged portion of the 2011 Term Loan with that on the interest rate cap (see below), the Company intends to use successive interest periods of three months and adjusted three-month LIBOR rates (with a LIBOR floor of 1.00% per annum) plus 2.75% on a per annum basis from July 29, 2011 through the maturity date of the 2011 Term Loan.

In addition, the 2011 Term Loan Agreement is subject to a 1.00% prepayment fee in the event it is refinanced on or before June 17, 2012, subject to certain conditions. The Borrowers must make mandatory prepayments of the term loans with the proceeds of asset dispositions and insurance proceeds from casualty events (subject to certain limitations), with a portion of any excess cash flow (as defined in the 2011 Term Loan Agreement) generated by Warnaco Group and with the proceeds of certain issuances of debt (subject to certain exceptions).

The 2011 Term Loan Agreement does not require the Borrowers to comply with any financial maintenance covenants. The 2011 Term Loan Agreement contains customary representations, warranties and affirmative covenants. The 2011 Term Loan Agreement also contains customary negative covenants providing limitations, subject to negotiated carve-outs, with respect to (i) incurrence of indebtedness and liens, (ii) significant corporate changes including mergers and acquisitions with third parties, (iii) investments, (iv) loans, (v) advances and guarantees to or for the benefit of third parties, (vi) hedge agreements, (vii) certain restricted payments and (viii) transactions with affiliates and certain other restrictive agreements, among others.

The 2011 Term Loan Agreement contains customary events of default, such as payment defaults, cross-defaults to other material indebtedness, bankruptcy and insolvency, the occurrence of a “Change of Control” (as defined in the 2011 Term Loan Agreement), or the failure to observe the certain covenants therein. Upon an event of default, the Lenders may, among other things, declare any then outstanding loans due and payable immediately.

The obligations of the Borrowers under the 2011 Term Loan Agreement are guaranteed by Warnaco Group and its indirect domestic subsidiaries (collectively, the “U.S. Guarantors”) pursuant to a Guaranty dated as of June 17, 2011 (the “Guaranty”).

The obligations under the 2011 Term Loan Agreement and the guarantees thereof, are secured by Warnaco Group, the Borrowers and each of the U.S. Guarantors, for the benefit of the Lenders, with a first priority lien on all fixed asset collateral (including, without limitation, pledges of their equity ownership in domestic subsidiaries and up to 66% of their equity ownership in first-tier foreign subsidiaries), intellectual property, and substantially all other personal property of the Borrowers and the U.S. Guarantors not constituting 2008 Credit Agreement Priority Collateral (as defined below), and, in each case, proceeds thereof. In addition, Warnaco Group, the Borrowers and each of the U.S. Guarantors have granted to the Lenders a second priority security interest in accounts receivable, inventory, deposit accounts and cash, checks and certain related assets (the “2008 Credit Agreement Priority Collateral”).

In connection with entering into the 2011 Term Loan Agreement, on June 17, 2011, (i) Warnaco Group, Warnaco and the U.S. Guarantors entered into an amendment to the 2008 Credit Agreement (the “2008 Credit Agreement Amendment”) and (ii) Warnaco Canada, Warnaco Group, Warnaco and the U.S. Guarantors entered into an amendment to the 2008 Canadian Credit Agreement (the “2008 Canadian Credit Agreement Amendment”), in each case, permitting the Borrowers to incur the indebtedness and grant the liens under the 2011 Term Loan Agreement, and providing, among other things, for modifications to the definitions of “Change of Control”, the eligibility criteria for receivables and certain covenants relating to asset sales, prepayments of debt, permitted liens and permitted indebtedness.

In addition, on June 17, 2011, Warnaco Group, the Borrowers and the U.S. Guarantors executed an Intercreditor Agreement (the “Intercreditor Agreement”), establishing certain priorities with respect to the collateral that secures the Borrowers’ obligations under the 2008 Credit Agreements and the 2011 Term Loan Agreement. Pursuant to the Intercreditor Agreement, the secured parties under the existing 2008 Credit Agreements retain a first priority security interest in all 2008 Credit Agreement Priority Collateral and a second priority security interest in all fixed asset collateral (including, without limitation, pledges of their equity ownership in domestic subsidiaries and up to 66% of their equity ownership in first-tier foreign subsidiaries), intellectual property and substantially all other personal property of Warnaco Group, the Borrowers and the U.S. Guarantors not constituting 2008 Credit Agreement Priority Collateral.

Interest Rate Cap Agreement

On July 1, 2011, the Company entered into a deferred premium interest rate cap agreement with HSBC Bank USA (the “Counterparty”), effective July 29, 2011, (notional amount $120,000) (the “Cap Agreement”). The Cap Agreement is a series of 27 individual caplets (in total, the “Cap”) that reset and settle quarterly over the period from October 31, 2011 to April 30, 2018. Under the terms of the Cap Agreement, if three-month LIBOR resets above a strike price of 1.00%, the Company will receive the net difference between the reset rate and the strike price. In addition, on the quarterly settlement dates, the Company will remit the deferred premium payment to the Counterparty. If LIBOR resets below the strike price no payment is made by the Counterparty. However, the Company would still be responsible for payment of the deferred premium. At July 1, 2011, the Company was obligated to make premium payments totaling approximately $16,015, based on an annual rate of 1.9475% on the notional amount of the Cap, over the term of the Cap Agreement. The effect of the Cap Agreement is to limit the interest rate payable to 5.6975% with respect to the portion of the 2011 Term Loan that equals the notional amount of the Cap.

The interest rate cap contracts are designated as cash flow hedges of the exposure to variability in expected future cash flows attributable to a three-month LIBOR rate beyond 1.00%. At the inception of the hedging relationship, the fair value of the Cap of $14,395 was allocated to the respective caplets within the Cap on a fair value basis. To the extent that the interest rate cap contracts are effective in offsetting that variability, changes in the Cap’s fair value will be recorded in Accumulated other comprehensive income in the Company’s Consolidated Condensed Balance Sheets and subsequently recognized in interest expense in the Consolidated Statements of Operations as the underlying interest expense is recognized on the 2011 Term Loan.

On July 1, 2011, the Company recorded the fair value of the Cap of $14,395 in Other assets and the fair value of the deferred premium payments of $14,395 as Deferred premium on interest rate cap in Other current liabilities ($1,764) and Other long-term liabilities ($12,631), all on the Company’s Consolidated Condensed Balance Sheet.

2008 Credit Agreements

On August 26, 2008, Warnaco, as borrower, and Warnaco Group, as guarantor, entered into a revolving credit agreement (the “2008 Credit Agreement”) and Warnaco of Canada Company, an indirect wholly-owned subsidiary of Warnaco Group, as borrower, and Warnaco Group, as guarantor, entered into a second revolving credit agreement (the “2008 Canadian Credit Agreement” and, together with the 2008 Credit Agreement, the “2008 Credit Agreements”), in each case with the financial institutions which, from time to time, will act as lenders and issuers of letters of credit. As noted above, on June 17, 2011, the 2008 Credit Agreements were amended in connection with the 2011 Term Loan Agreement.

At July 2, 2011, the 2008 Credit Agreement had interest rate options (dependent on the amount borrowed and the repayment period) of (i) 3.75%, based on a base rate plus 0.50%, or (ii) 1.75%, based on LIBOR plus 1.50%. The 2008 Canadian Credit Agreement had interest rate options of (i) 3.50%, based on the prime rate announced by Bank of America (acting through its Canada branch) plus 0.50%, or (ii) 2.70%, based on the BA Rate (as defined below), in each case, on a per annum basis. The BA Rate is defined as the annual rate of interest quoted by Bank of America (acting through its Canada branch) as its rate of interest rate for bankers’ acceptances in Canadian dollars for a face amount similar to the amount of the loan and for a term similar to the applicable interest period.

During June 2011, the Company used a portion of the proceeds from the 2011 Term Loan to repay the outstanding balances of the 2008 Credit Agreements. As of July 2, 2011, the Company had no loans and approximately $39,341 in letters of credit outstanding under the 2008 Credit Agreement, leaving approximately $163,873 of availability. As of July 2, 2011, there were no loans and $3,220 in letters of credit outstanding under the 2008 Canadian Credit Agreement and the available line of credit was approximately $19,833. As of July 2, 2011, the Company was in compliance with all financial covenants contained in the 2008 Credit Agreements.

CKJEA Notes and Other Short-Term Debt

Certain of the Company’s European businesses hold short-term notes payable (the “CKJEA Notes”). The total amounts of CKJEA Notes payable of $3,764 at July 2, 2011, $18,445 at January 1, 2011 and $38,289 at July 3, 2010 each consist of short-term revolving notes with a number of banks at various interest rates (primarily Euro LIBOR plus 1.0%). The weighted average effective interest rate for the outstanding CKJEA notes payable was 3.27% as of July 2, 2011, 4.29% as of January 1, 2011 and 2.49% as of July 3, 2010. All of the CKJEA notes payable are short-term and were renewed during the Six Months Ended July 2, 2011 for additional terms of no more than 12 months.

In addition, at July 2, 2011, January 1, 2011 and July 3, 2010, the Company’s Brazilian subsidiary, WBR, had lines of credit with several banks, with total outstanding balances of $5,145, $357 and $1,592, respectively, recorded in Short-term debt in the Company’s Consolidated Condensed Balance Sheets or Consolidated Balance Sheets, which were secured by approximately equal amounts of WBR’s trade accounts receivable.

Italian Note

On September 30, 2010, one of the Company’s Italian subsidiaries entered into a €10,000 loan (the “Italian Note”). On June 30, 2011, the Company repaid the full outstanding balance of €6,040 ($8,600) on the Italian Note with a portion of the proceeds of the 2011 Term Loan (see above). At January 1, 2011, the principal balance of the Italian Note was €10,000 ($13,370) with an annual interest rate of 3.64%.