Debt

3 Months Ended

Sep. 30, 2022

Debt Disclosure [Abstract]

Debt

Debt

Debt is comprised of the following (in thousands):

	9/30/2022		6/30/2022
Short-term and current maturities
Loan and Security Agreement (Term loan)	1,495		1,495
Brazil Loans	3,889		5,052
	5,384		6,547
Long-term debt (net of current portion)
Loan and Security Agreement (Term Loan)	9,878		10,252
Loan and Security Agreement (Line of Credit)	11,397		11,397
Brazil Loans	3,220		3,771
Debt Reacquisition Cost	(488)		(515)
	24,007		24,905
Total Debt	$	29,391	$	31,452

On April 29, 2022, the Company and certain of the Company’s domestic subsidiaries entered into a Loan and Security agreement with HSBC Bank USA (the "Loan and Security Agreement"). The Company incurred an increase in debt of $0.5 million as a result of debt reacquisition cost.

These new credit facilities replaced the Company’s previous TD Bank credit facilities and are comprised of a $30 million revolving line of credit with a $10 million uncommitted accordion provision, a $12.1 million term loan and a $7 million Capital Expenditure draw down credit facility (collectively, the "Facilities"). The Facilities are secured by a valid first-priority security interest on substantially all existing and future assets of the Company and its domestic subsidiaries.

The interest rate on the Facilities is based on a grid which uses the percentage of the remaining availability of the revolving credit line to determine the floating margin to be added to the one month or three month Secured Overnight Financing Rate, ("SOFR)". The initial rate for the first three months of the Loan and Security Agreement is the one-month SOFR plus 1.60%. The Facilities mature on April 29, 2027.

Availability under the revolving line of credit is secured by and subject to a borrowing base comprised of eligible inventory and accounts receivable. The percentage of receivables included in the borrowing base is 90% for domestic investment grade and foreign insured accounts, 85% for domestic accounts that are neither investment grade nor insured, and 75% of foreign uninsured accounts. The percentage of inventory included in the borrowing base is the lower of 65% of the value of eligible inventory at cost or 85% of the net orderly liquidation value of eligible inventory at cost. Receivables and inventory are reported monthly to HSBC and subject to an annual field exam and inventory appraisal by an independent auditor commissioned by the Bank. The Company believes that the agreement provides an initial borrowing base sufficient for current domestic working capital needs and flexibility to accommodate potential growth-related working capital needs.

Availability under the Term Loan facility was comprised of 70% of the fair market value of the Borrowers’ eligible real estate, which included facilities located in Westlake, Ohio, and Waite Park, Minnesota and totaled $4.6 million; and 85% of the net orderly liquidation value of the Borrowers’ machinery and equipment, capped at $7.5 million. The real estate portion of the Term facility is subject to a 12.5 year straight line amortization paid quarterly, and the machinery and equipment portion of the facility is subject to a 6.67 year straight line amortization, also paid quarterly. The term loan is subject to equal quarterly installments of $373,650, payable on the last day of each fiscal quarter.

The capital expenditure loan facility is available for the purchase of new machinery and equipment at 80% of the net invoice value of new machinery and equipment purchases, with a draw period of eighteen months past the closing date, with any amount outstanding under the facility subject to a 3.75% amortization rate per quarter.

The Facilities contain financial covenants with respect to a minimum fixed charge coverage ratio of 1.00, measured on a trailing twelve-month basis, for both the U.S. borrowing companies tested quarterly and the Consolidated L.S. Starrett Company tested semi-annually. The Loan and Security agreement also contains the customary affirmative and negative covenants, including limitations on indebtedness, liens, acquisitions, asset dispositions, fundamental corporate changes, excess pension contributions, and certain customary events of default. Upon the occurrence or continuation of an event of default, the Lender may terminate

all commitments and facilities, and require the immediate payment of the entire unpaid principal balances, accrued interest, and all other obligations.

The TD Bank loan was retired in the quarter ended June 2022.. Prior to the Loan and Security Agreement with HSBC, the Company’s Amended and Restated Loan and Security Agreement of June 25, 2020, the “First Amendment” to this loan agreement was executed on September 17, 2020, which include, among other things, (i) pause testing of the Fixed Charge Coverage Ratio until September 30, 2021 and (ii) establishment of a new minimum cumulative EBITDA and minimum liquidity covenants in lieu thereof. 

Total debt decreased $2.1 million during the three months ended September 30, 2022 and $1.7 million of which was a decrease in Brazilian loans. This is a result of cash provided from operations of $0.6 million and the use of the credit balance of $0.6 million of the contingency gain, related to exclusion of ICMS.

In Brazil, the Company is actively mitigating this consequence of the build-up of ICMS (sales tax) credits by filing applications with the relevant tax authorities to change the methodology of charging and re-claiming ICMS on imports and domestic sales so that this credit is subsequently relieved and does not increase at this rate again. This new methodology is common for similar sized, export focused companies in Brazil. The ICMS balance as of June 30, 2022 was $5.4 million and as of September 30, 2022 was $4.9 million.

Availability under the Line of Credit remains subject to a borrowing base comprised of Accounts Receivable, Inventory, and Real Estate. The Company believes that the borrowing base will consistently produce availability under the Line of Credit of $25.0 million. A 0.25% commitment fee is charged on the unused portion of the Line of Credit.

The Company’s Brazilian subsidiary incurs short-term loans with local banks in order to support the Company’s strategic initiatives. The loans are backed by the entity’s US dollar denominated export receivables. The Company’s Brazilian subsidiary has the following loans of September 30, 2022 (in thousands):

Lending Institution	Interest Rate		Beginning Date	Ending Date	Outstanding Balance
Itau	4.52	%	October 2021	September 2024	$	4,000
Santander	2.71	%	December 2021	December 2022	275
Bradesco	2.52	%	January 2022	January 2023	443
Itau	4.98	%	February 2022	February 2024	1,828
Brasil	4.95	%	August 2022	July 2025	401
Brasil	3.80	%	September 2022	August 2024	115
Brasil	4.18	%	September 2022	September 2023	48
					$	7,110