Long-term Debt, Lease Obligations and Interest Rate Caps

9 Months Ended

Sep. 30, 2011

Long-term Debt, Lease Obligations and Interest Rate Caps [Abstract]

Long-term Debt, Lease Obligations and Interest Rate Caps

(6) Long-term Debt, Lease Obligations and Interest Rate Caps


	September 30,			December 31,
Obligations (in thousands)	2011			2010
$100.0 million revolving line of credit	$	—		$	—
Term loan facility		100,250			103,250
Facility lease obligation		3,209			3,657
Equipment capital leases		321			1,753

Total		103,780			108,660
Current portion of long-term debt and lease obligations		(4,859	)		(6,073	)

Non-current portion of long-term debt and lease obligations	$	98,921		$	102,587

Revolving Line of Credit and Term Loan Facility

In March 2010, ION, its Luxembourg subsidiary, ION International S.à r.l. (“ION Sàrl”), and certain of its other U.S. and foreign subsidiaries entered into a new credit facility (the “Credit Facility”). The terms of the Credit Facility are set forth in a credit agreement dated as of March 25, 2010 (the “Credit Agreement”), by and among ION, ION Sàrl and China Merchants Bank Co., Ltd., New York Branch (“CMB”), as administrative agent and lender. The obligations of ION under the Credit Facility are guaranteed by certain of ION’s material U.S. subsidiaries and the obligations of ION Sàrl under the Credit Facility are guaranteed by certain of ION’s material U.S. and foreign subsidiaries, in each case that are parties to the Credit Agreement. In addition, in June 2010, INOVA Geophysical also entered into an agreement to guarantee the indebtedness under the Credit Facility.

The Credit Facility provides ION with a revolving line of credit of up to $100.0 million in borrowings (including borrowings for letters of credit) and refinanced ION’s outstanding term loan with a new term loan in the original principal amount of $106.3 million.

The revolving credit sub-facility and term loan under the Credit Facility are each scheduled to mature on March 24, 2015. The principal amount under the term loan is subject to scheduled quarterly amortization payments that commenced on June 30, 2010, of $1.0 million per quarter until the maturity date, upon which the remaining unpaid principal amount of the term loan becomes due and payable. The indebtedness under the Credit Facility may sooner mature on a date that is 18 months after the earlier of (i) any dissolution of INOVA Geophysical, or (ii) the administrative agent determining in good faith that INOVA Geophysical is unable to perform its obligations under its guarantee.

The interest rate per annum on borrowings under the Credit Facility will be, at ION’s option:

	•		An alternate base rate equal to the sum of (i) the greatest of (a) the prime rate of CMB, (b) a federal funds effective rate plus 0.50%, or (c) an adjusted LIBOR-based rate plus 1.0%, and (ii) an applicable interest margin of 2.5%; or

	•		For Eurodollar borrowings and borrowings in Euros, Pounds Sterling or Canadian Dollars, the sum of (i) an adjusted LIBOR-based rate, and (ii) an applicable interest margin of 3.5%.

As of September 30, 2011, the $100.3 million in outstanding term loan indebtedness under the Credit Facility accrued interest at a rate of 3.7% per annum.

The Credit Facility requires compliance with certain financial covenants. Certain of these financial covenants became effective on June 30, 2011, and will continue in effect for each fiscal quarter thereafter over the term of the Credit Facility. These financial covenants require ION and its U.S. subsidiaries to:

	•		Maintain a minimum fixed charge coverage ratio in an amount equal to at least 1.125 to 1;

	•		Not exceed a maximum leverage ratio of 3.25 to 1; and

•

Maintain a minimum tangible net worth of at least 60% of ION’s tangible net worth as of March 31, 2010, as defined in the Credit Agreement.

The fixed charge coverage ratio is defined as the ratio of (i) ION’s consolidated EBITDA less cash income tax expense and non-financed capital expenditures, to the sum of (ii) scheduled payments of lease payments and payments of principal indebtedness, interest expense actually paid and cash dividends, in each case for the four consecutive fiscal quarters most recently ended. The leverage ratio is defined as the ratio of (x) total funded consolidated debt, capital lease obligations and issued letters of credit (net of cash collateral) to (y) consolidated EBITDA of ION for the four consecutive fiscal quarters most recently ended. As of September 30, 2011, the Company was in compliance with these financial covenants and expects to remain in compliance with these financial covenants through the remainder of 2011.

The fair market value of the Company’s outstanding long-term debt was $107.3 million at September 30, 2011 compared to a carrying value of $103.8 million. The fair value of the long-term debt was calculated using an estimated interest rate reflecting current market conditions.

Interest Rate Caps

In August 2010, the Company entered into an interest rate cap agreement and purchased interest rate caps (the “August 2010 Caps”) having an initial notional amount of $103.3 million with a three-month average LIBOR cap of 2.0%. If and when the three-month average LIBOR rate exceeds 2.0%, the LIBOR portion of interest owed by the Company would be capped at 2.0%. The initial notional amount was set to equal the projected outstanding balance under the Company’s term loan facility at December 31, 2010. The notional amount was then set so as not to exceed the Company’s outstanding balance of its term loan facility over a period extending through March 29, 2013. The Company purchased these interest rate caps for approximately $0.4 million and designated the interest rate caps as cash flow hedges.

In July 2011, the Company purchased additional interest rate caps (the “July 2011 Caps”) related to its term loan facility. The notional amounts of the July 2011 Caps, together with the notional amounts of the August 2010 Caps, were set so as not to exceed the outstanding balance of the Company’s term loan facility over a period that extends through March 31, 2014. The Company purchased these interest rate caps for an amount equal to approximately $0.3 million and designated the interest rate caps as cash flow hedges.

As of September 30, 2011, the Company held interest rate caps as follows (amounts in thousands):


				Notional Amounts
Payment Date	Cap Rate			August 2010 Caps		July 2011 Caps		Total
December 29, 2011		2.0	%	$	90,225	$	—	$	90,225
March 29, 2012		2.0	%	$	89,325	$	—	$	89,325
June 29, 2012		2.0	%	$	68,775	$	18,850	$	87,625
September 28, 2012		2.0	%	$	68,075	$	18,650	$	86,725
December 31, 2012		2.0	%	$	67,375	$	18,450	$	85,825
March 29, 2013		2.0	%	$	66,675	$	18,250	$	84,925
June 28, 2013		2.0	%	$	—	$	63,175	$	63,175
September 30, 2013		2.0	%	$	—	$	62,475	$	62,475
December 31, 2013		2.0	%	$	—	$	61,775	$	61,775
March 31, 2014		2.0	%	$	—	$	61,075	$	61,075

These interest rate caps have been designated as cash flow hedges according to ASC 815 (“Derivatives and Hedging”) and, accordingly, the effective portion of the change in fair value of these interest rate caps are recognized in other comprehensive income in the Company’s consolidated financial statements. The Company has recorded the fair value of these interest rate caps as a noncurrent asset included in other assets on its condensed consolidated balance sheet. As of September 30, 2011, the total fair value of the interest rate caps was $0.1 million, which was based on Level 2 inputs such as interest rates and yield curves that are observable at commonly quoted intervals. For the three and nine months ended September 30, 2011, there was approximately $0.2 million, net of tax, and $0.3 million, net of tax, respectively, related to the change in fair value included in other comprehensive income. Unrealized gains or losses included in other comprehensive income related to these interest rate caps will be reclassified into earnings as each interest rate caplet settles on the contractual payment dates as shown in the table above.