LONG-TERM DEBT AND INTEREST RATE SWAP

6 Months Ended

Jun. 30, 2020

Debt Disclosure [Abstract]

LONG-TERM DEBT AND INTEREST RATE SWAP

LONG-TERM DEBT AND INTEREST RATE SWAPOn February 26, 2016, the Company executed an Amended and Restated Credit Agreement (the "Credit Agreement") with a syndicate of banks, which consists of a $80,000 mortgage loan subsequently amended ("Amended Mortgage Loan") and a $52,250 revolver subsequently amended ("Amended Revolver"). The Amended Mortgage Loan and Amended Revolver both have a five-year maturity through September 30, 2021. The Amended Mortgage Loan consists of $67,500 term and $12,500 acquisition loan facilities. The Amended Mortgage Loan requires monthly principal and interest payments monthly based on a 25-year amortization. Interest on the term and acquisition loan facilities is based on LIBOR plus 4.0% and 4.75%, respectively. A portion of the Amended Mortgage Loan is effectively fixed at 5.79% pursuant to an interest rate swap with an initial notional amount of $30,000. The Amended Mortgage Loan balance was $60,112 as of June 30, 2020, consisting of $48,712 on the term loan facility with an interest rate of 4.50% and $11,400 on the acquisition loan facility with an interest rate of 5.25%. The Amended Mortgage Loan is secured by fifteen owned nursing centers, related equipment and a lien on the accounts receivable of these centers. The Amended Mortgage Loan and the Amended Revolver are cross-collateralized and cross-defaulted. The

Company’s Amended Revolver has an interest rate of LIBOR plus 4.0% and is secured by accounts receivable and is subject to limits on the maximum amount of loans that can be outstanding under the revolver based on borrowing base restrictions.

In connection with the sale of the Kentucky Properties, the Company entered into the Sixth Amendment ("Sixth Revolver Amendment") to amend the Amended Revolver effective December 1, 2018. The Sixth Amendment decreased the Amended Revolver capacity from $52,250 to $42,250 and also placed a $2,100 reserve against the acquisition loan facility, thereby reducing the maximum borrowing capacity of that facility to $10,400. The Company also applied $4,947 of net proceeds from the sale of the Kentucky Properties to the outstanding borrowings under the Amended Revolver.

Effective April 3, 2020, the Company entered into a Seventh Amendment ("Seventh Amendment") to amend the Amended Mortgage Loan, a Ninth Amendment ("Ninth Amendment") to amend the Amended Revolver and a Second Amendment ("Second Amendment") to the affiliated revolver. The Seventh Amendment removed the reserve of $2,100 on the acquisition loan availability, thereby increasing the borrowing capacity of that facility from $10,400 to $12,500 as of June 30, 2020. The Ninth Amendment and Second Amendment increased the eligible days of qualifying accounts receivable from 120 days to 150 days for the purpose of calculating our borrowing capacity on the revolvers. The new LIBOR base rate was set at 0.5%.

The Company is participating in the Texas Quality Incentive Payment Program ("QIPP"). Effective May 13, 2019, the Company entered into a Fifth Amendment (the “Fifth Term Amendment”) to amend the Amended Mortgage Loan to release the operators of three of the QIPP centers in Texas from the Amended Mortgage Loan and a Seventh Amendment (the “Seventh Revolver Amendment”) to amend the Amended Revolver to remove the operators of four of the QIPP centers in Texas from the Amended Revolver and to permanently reduce the amount available under the Amended Revolver by $2,000. At the same time, the operators of these four facilities entered into a separate revolving loan (the "affiliated revolver") with the same syndicate of banks to provide for the temporary working capital requirements of the four QIPP centers. The affiliated revolver, which is guaranteed by the Company, had an initial capacity of $5,000, which amount was reduced by $1,000 on each of January 1, 2020, April 1, 2020 and July 1, 2020. The affiliated revolver has the same maturity date as the Amended Revolver and the Amended Mortgage Loan of September 30, 2021. The affiliated revolver is cross-defaulted with the Amended Revolver and the Amended Mortgage Loan. For further discussion of the QIPP centers in Texas, refer to Note 12, "Business Development and Other Significant Transactions." As of June 30, 2020, the Company had no outstanding borrowings under the affiliated revolver. The interest rate related to the affiliated revolver was 5.75% as of June 30, 2020. The balance available for borrowing under the affiliated revolver was $1,027 at June 30, 2020.

As of June 30, 2020, the Company had no outstanding borrowings under the Amended Revolver compared to $15,000 outstanding borrowings as of December 31, 2019. The interest rate related to the Amended Revolver was 5.75% as of June 30, 2020. The outstanding borrowings on the revolver were used primarily for temporary working capital requirements. Annual fees for letters of credit issued under the Amended Revolver are 3.0% of the amount outstanding. The Company has four letters of credit with a total value of $12,143 outstanding as of June 30, 2020. Considering the balance of eligible accounts receivable, the letters of credit, the amounts outstanding under the revolving credit facility and the maximum loan amount of $27,727, the balance available for borrowing under the Amended Revolver and affiliated revolver was $15,584 at June 30, 2020.

The Company’s debt agreements contain various financial covenants, the most restrictive of which relates to debt service coverage ratios. The Company is in compliance with all such covenants at June 30, 2020.

Interest Rate Swap Transaction

As part of the debt agreements entered into in April 2013, the Company entered into an interest rate swap agreement with a member of the bank syndicate as the counterparty. The Company entered into the interest rate swap agreement to mitigate the variable interest rate risk on its outstanding mortgage borrowings. The Company designated its interest rate swap as a cash flow hedge and the effective portion of the hedge, net of taxes, is reflected as a component of other comprehensive income (loss). In conjunction with the aforementioned amendment to the Credit Agreement that occurred in February 2016, the Company retained the previously agreed upon interest rate swap modifying the terms of the swap to reflect the amended Credit Agreement. The Company redesignated the interest rate swap as a cash flow hedge. The interest rate swap agreement has a maturity date of February 26, 2021, and has an amortizing notional amount of $26,314 as of June 30, 2020. The interest rate swap agreement requires the Company to make fixed rate payments to the bank calculated on the applicable notional amount at an annual fixed rate of 5.79% while the bank is obligated to make payments to the Company based on LIBOR on the same notional amount. The applicable guidance requires companies to recognize all derivative instruments as either assets or liabilities at fair value in a company's balance sheets.

The Company assesses the effectiveness of its interest rate swap on a quarterly basis, and at June 30, 2020, the Company determined that the interest rate swap was highly effective. The interest rate swap valuation model indicated a net liability of $276 at June 30, 2020. The fair value of the interest rate swap is included in “other current liabilities” on the Company’s interim consolidated balance sheet. The change in fair value of the interest rate swap liability of $59 is included in accumulated other comprehensive income for the three months ended June 30, 2020. As the Company’s interest rate swap is not traded on a market exchange, the fair value is determined using a discounted cash flow analysis. This analysis reflects the contractual terms

of the interest rate swap agreement and uses observable market-based inputs, including estimated future LIBOR interest rates. The interest rate swap valuation is classified in Level 2 of the fair value hierarchy, in accordance with the FASB guidance set forth in ASC 820, Fair Value Measurement.