UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
Date of report (Date of earliest event reported): December 11, 2018
HERITAGE INSURANCE HOLDINGS, INC.
(Exact Name of Registrant as Specified in its Charter)
| Delaware | 001-36462 | 45-5338504 | ||
| (State or Other Jurisdiction of Incorporation) |
(Commission File Number) |
(IRS Employer Identification No.) | ||
| 2600 McCormick Drive, Suite 300 Clearwater, Florida |
33759 | |||
| (Address of Principal Executive Offices) | (Zip Code) | |||
Registrant’s telephone number, including area code: (727) 362-7202
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
| ☐ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ☐ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ☐ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ☐ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
| Item 1.01 | Entry into a Material Definitive Agreement. |
On December 14, 2018, Heritage Insurance Holdings, Inc. (the “Company”), as borrower, entered into a five-year, $125 million credit agreement (the “Credit Agreement”) by and among the Company, certain subsidiaries of the Company from time to time party thereto as guarantors, the lenders from time to time party thereto (the “Lenders”), Regions Bank, as Administrative Agent and Collateral Agent, BMO Harris Bank N.A., as Syndication Agent, Hancock Whitney Bank and Canadian Imperial Bank of Commerce, as Co-Documentation Agents, and Regions Capital Markets and BMO Capital Markets Corp., as Joint Lead Arrangers and Joint Bookrunners.
Pursuant to the Credit Agreement, the participating Lenders agreed to provide (1) a senior secured term loan facility in an aggregate principal amount of $75 million (the “Term Loan Facility”) and (2) a senior secured revolving credit facility in an aggregate principal amount of $50 million (inclusive of a $5 million sublimit for the issuance of letters of credit and a $10 million sublimit for swingline loans) (the “Revolving Credit Facility” and together with the Term Loan Facility, the “Credit Facilities”).
The Company intends to use the net proceeds of the Credit Facilities and the Advance described in Item 2.03 below (1) to redeem all $79,500,000 outstanding aggregate principal amount of the Company’s Senior Notes due 2023, (2) to purchase certain of its outstanding 5.875% Convertible Notes due 2037 (“the Convertible Notes”), as described in Item 3.02 below, and (3) for general corporate purposes.
Interest Rate and Fees
At the Company’s option, borrowings under the Credit Facilities will bear interest at rates equal to either (1) a rate determined by reference to LIBOR (based on one, two, three or six-month interest periods), adjusted for statutory reserve requirements, plus an applicable margin (equal to 3.25% as of the Closing Date) or (2) a base rate determined by reference to the greatest of (a) the “prime rate” of Regions Bank, (b) the federal funds rate plus 0.50%, and (c) the LIBOR index rate applicable for an interest period of one month plus 1.00%, plus an applicable margin (equal to 2.25% as of the Closing Date).
The applicable margin for loans under the Credit Facilities varies from 3.25% per annum to 3.75% per annum (for LIBOR loans) and 2.25% to 2.75% per annum (for base rate loans) based on the Company’s consolidated leverage ratio. Interest payments with respect to the Credit Facilities are required either on a quarterly basis (for base rate loans) or at the end of each interest period (for LIBOR loans) or, if the duration of the applicable interest period exceeds three months, then every three months.
In addition to paying interest on outstanding borrowings under the Revolving Credit Facility, the Company is required to pay a quarterly commitment fee based on the unused portion of the Revolving Credit Facility, which is determined by the Company’s consolidated leverage ratio.
Maturity and Amortization
Each of the Revolving Credit Facility and the Term Loan Facility mature on December 14, 2023. The principal amount of the Term Loan Facility amortizes in quarterly installments, beginning with the close of the fiscal quarter ending March 31, 2019, in an amount equal to $1,875,000 per quarter, payable monthly or quarterly, with the balance payable at maturity.
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Prepayments
The Company may prepay the loans under the Credit Facilities, in whole or in part, at any time without premium or penalty, subject to certain conditions including minimum amounts and reimbursement of certain costs in the case of prepayments of LIBOR loans. In addition, the Company is required to prepay the loan under the Term Loan Facility with the proceeds from certain financing transactions, involuntary dispositions or asset sales (subject, in the case of asset sales, to reinvestment rights).
Guarantees
All obligations under the Credit Facilities are or will be guaranteed by each existing and future direct and indirect wholly-owned domestic subsidiary of the Company, other than all of the Company’s current and future regulated insurance subsidiaries (collectively, the “Guarantors”).
Security
The Company and the Guarantors entered into a Pledge and Security Agreement, dated as of December 14, 2018 (the “Security Agreement”), in favor of Regions Bank, as collateral agent. Pursuant to the Security Agreement, amounts borrowed under the Credit Facilities are secured on a first priority basis by a perfected security interest in substantially all of the present and future assets of the Company and each Guarantor (subject to certain exceptions), including all of the capital stock of the Company’s domestic subsidiaries, other than its regulated insurance subsidiaries.
Certain Covenants and Events of Default
The Credit Agreement contains, among other things, covenants, representations and warranties and events of default customary for facilities of this type. The Company is required to maintain, as of each fiscal quarter (1) a maximum consolidated leverage ratio of 3.25 to 1.00 for each fiscal quarter ending on or before December 31, 2019, stepping down on each of the three anniversaries thereafter; (2) a minimum consolidated fixed charge coverage ratio of 1.20 to 1.00 and (3) a minimum consolidated net worth for the Company and its subsidiaries. Events of default include, among other events, (i) nonpayment of principal, interest, fees or other amounts; (ii) failure to perform or observe certain covenants set forth in the Credit Agreement; (iii) breach of any representation or warranty; (iv) cross-default to other indebtedness; (v) bankruptcy and insolvency defaults; (vi) monetary judgment defaults and material nonmonetary judgment defaults; (vii) customary ERISA defaults; (viii) a change of control of the Company; and (ix) failure to maintain specified catastrophe retentions in each of the Company’s regulated insurance subsidiaries.
Certain Relationships
The Lenders and their affiliates may in the future engage in transactions with and perform services, including commercial banking, financial advisory and investment banking services, for the Company and its affiliates in the ordinary course of business for which they may receive customary fees and expenses.
The foregoing description of the Credit Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Credit Agreement a copy of which will be filed as an exhibit to the Company’s Annual Report Form 10-K for the fiscal year ended December 31, 2018.
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| Item 2.03 | Creation of a Direct Financial Obligation or an Obligation under an Off-Balance Sheet Arrangement of a Registrant. |
Credit Agreement
The information contained in Item 1.01 concerning the Company’s obligations under the Credit Agreement is hereby incorporated herein by reference.
Advance
On December 13, 2018, the Company requested and received an advance of $19.2 million (the “Advance”) pursuant to an Advances and Security Agreement (an “Advances Agreement”). The Advance bears interest at a rate of 3.094% per annum and matures on December 13, 2023. Advances made under the Advances Agreement are secured by assets of certain of the Company’s subsidiaries. The Advances Agreement contains, among other things, covenants, representations and warranties and events of default customary for agreements of this type.
| Item 3.02 | Unregistered Sales of Equity Securities. |
On December 11, December 13 and December 17, 2018, the Company entered into separately negotiated exchange agreements (the “Exchange Agreements”) pursuant to which Convertible Notes in the aggregate principal amount of $72,725,000 will be exchanged (the “Exchanges”) for a combination of cash and the issuance of an aggregate of 3,595,452 shares of the Company’s common stock, par value $0.0001 per share (the “Common Stock”). The Company expects to complete the Exchanges on or before December 21, 2018. The issuance of the Common Stock is being made in reliance on the exemption from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(2) thereof.
| Item 7.01 | Regulation FD Disclosure. |
On December 17, 2018, the Company issued a press release regarding its entry into the Credit Agreement and other items discussed herein. A copy of the press release is furnished as Exhibit 99.1 hereto.
| Item 8.01 | Other Events. |
On December 17, 2018, the Company utilized proceeds from the Credit Facilities and Advance to redeem all of its outstanding Senior Secured Notes due 2023 in the aggregate principal amount of $79,500,000.
| Item 9.01 | Financial Statements and Exhibits. |
(d) Exhibits
| 99.1 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| HERITAGE INSURANCE HOLDINGS, INC. | ||||||
| Date: December 17, 2018 | By: | /s/ Bruce Lucas | ||||
| Bruce Lucas Chairman and Chief Executive Officer | ||||||
Exhibit 99.1
Heritage Insurance Holdings, Inc. Announces New Credit Facilities, Redemption of Senior Notes and Repurchase of Convertible Notes
Clearwater, FL: Heritage Insurance Holdings, Inc. (NYSE: HRTG) (“Heritage” or the “Company”), a property and casualty insurance holding company, announced today that it has made several enhancements to its capital structure. The Company entered into new five-year, $125.0 million secured credit facilities with Regions Bank as Administrative Agent, consisting of a $75.0 million term loan and a $50.0 million revolving credit facility. The Company intends to use proceeds of its new credit facilities, along with other funds, to redeem all $79.5 million principal amount of its outstanding senior secured notes and to repurchase $72.7 million principal amount of the Company’s outstanding convertible senior notes. The convertible note repurchases are being made pursuant to privately-negotiated exchange agreements, with all such transactions expected to close on or before December 21, 2018. At closing, the convertible note holders will receive a combination of cash and an aggregate of 3,595,452 shares of the Company’s common stock.
As previously disclosed, in October 2018 Heritage repurchased $3.1 million principal amount of convertible notes via open market transactions. Following the closing of the exchange agreements announced today, the Company’s quarter-to-date repurchases of convertible notes will total $75.8 million in principal amount.
In total, the Company will borrow $114.2 million at a 5.30%* blended interest rate, while retiring $155.4 million of debt at an 8.5%* blended interest rate.
Key points, reflecting consummation of all transactions described above:
| • | 79% of the convertible notes issued in 2017 will have been repurchased, leaving only $29.2 million in principal amount outstanding held by third parties. |
| • | 3,595,452 shares will be issued to existing convertible note holders. |
| • | Excluding amortization, annual interest expense is estimated at $8.4 million (5.4%* blended interest rate) vs. $15.6 million (7.9%* blended interest rate) as of September 30, 2018, reflecting $7.2 million of annual pre-tax savings (approximately $5.3 million after-tax). |
| • | Relative to third quarter 2018, the Company expects its issuance of 3,595,452 shares to increase tangible book value per share by approximately 4% and to reduce book value per share by approximately 6% (book value per share was $15.16 at third quarter 2018). This only reflects the impact of the share issuance, not the entire transaction described herein. |
| • | Despite the issuance of 3,595,452 shares, the Company only expects a minor negative impact to EPS given the favorable offsetting impact of anticipated debt service savings. |
| • | The Company expects its debt-to-capital ratio to decline meaningfully, reducing overall risk profile. |
| • | One-time $2.4 million premium expense expected in fourth quarter 2018 on early redemption of $79.5 million senior secured notes. |
Bruce Lucas, Chairman & CEO, said, “Improving our capital structure and retiring our convertible notes has been a key focus over the past year and these transactions are a significant enhancement. Our new capital structure reduces debt service by almost 50% on favorable terms and conditions, and will generate higher net income for the Company for the forseeable future. Our convertible notes have acted as an overhang on our share price due to the short positions associated with the convertible notes. We issued sufficient shares to cover these short positions, which should eliminate over 90% of the short interest in our common stock. Preserving book value and earnings per share expectations was an important consideration. Although 3.6 million shares were issued, these shares generate significant net income from debt service savings. As a result, we expect a slight impact to book value per share in the quarter, and an even smaller impact to earnings per share for 2019. This transaction also reduces volatility in our share count, reduces future dilution, lowers our financial leverage, and increases tangible book value per share.”
Regions Capital Markets, a division of Regions Bank, acted as Left Lead Arranger and Joint Book Runner on the new credit facilities. Regions Securities LLC acted as sole financial advisor with respect to the exchange transactions. Stonybrook Capital acted as an advisor to Heritage.
| * | Interest rates on new and retired debt include variable and fixed components and are calculated based on the prevailing contractual rates at the time of this press release. |
About Heritage
Heritage Insurance Holdings, Inc. is a property and casualty insurance holding company headquartered in Clearwater, Florida.
Its insurance subsidiaries, Heritage Property & Casualty Insurance Company, Zephyr Insurance Company, and Narragansett Bay Insurance Company, write over $900 million of personal and commercial residential premium through a large network of experienced agents. The Company is currently writing property and casualty insurance policies in Alabama, Connecticut, Florida, Georgia, Hawaii, Massachusetts, New Jersey, New York, North Carolina, Rhode Island, and South Carolina. Heritage Insurance Holdings, Inc. is led by a seasoned senior management team with an average of 25 years of insurance industry experience.
Forward-Looking Statements
Statements in this press release that are not historical facts are forward-looking statements that are subject to certain risks and uncertainties that could cause actual events and results to differ materially from those discussed herein. Without limiting the generality of the foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “would,” “estimate,” “or “continue” or the other negative variations thereof or comparable terminology are intended to identify forward-looking statements. This release includes forward-looking statements relating to (i) the effects of the new credit facilities on our capital structure, including expected lower annualized interest expense, (ii) our anticipated use of proceeds from the new credit facilities, (iii) the timing of the redemption of the senior secured notes, (iv) the expected timing and amount of the closing of the convertible senior note exchanges, (v) expected effects to tangible book value per share, book value per share, EPS, debt service costs and debt-to-capital ratio, (vi) expected positive financial effects in the fourth quarter of 2018 and (vii) expected reduction to number of shares held short. The risks and uncertainties that could cause our actual results to differ from those expressed or implied herein include, without limitation: our ability to comply with our obligations under the new credit facilities, including the financial and other covenants contained therein, the success of the Company’s marketing initiatives; inflation and other changes in economic conditions (including changes in interest rates and financial markets); the impact of new federal and state regulations that affect the property and casualty insurance market; the costs of reinsurance and the collectability of reinsurance; assessments charged by various governmental agencies; pricing competition and other initiatives by competitors; our ability to obtain regulatory approval for requested rate changes, and the timing thereof; legislative and regulatory developments; the outcome of litigation pending against us, including the terms of any settlements; risks related to the nature of our business; dependence on investment income and the composition of our investment portfolio; the adequacy of our liability for losses and loss adjustment expense; our ability to build and maintain relationships with insurance agents; claims experience; ratings by industry services; catastrophe losses; reliance on key personnel; weather conditions (including the severity and frequency of storms, hurricanes, tornadoes and hail); changes in loss trends; acts of war and terrorist activities; court decisions and trends in litigation; and other matters described from time to time by us in our filings with the Securities and Exchange Commission, including, but not limited to, the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission on March 15, 2018. The Company undertakes no obligations to update, change or revise any forward-looking statement, whether as a result of new information, additional or subsequent developments or otherwise.
Heritage Insurance Holdings Inc.
Investor Contact:
Arash Soleimani, CFA, CPA
Executive Vice President & Director of Investor Relations
727.871.0206
Email: asoleimani@heritagepci.com