Long-term Debt

6 Months Ended

Mar. 31, 2012

Long-term Debt

Long-term Debt

6.Long-term Debt

The total undiscounted face amount of Headwaters’ outstanding long-term debt was $543.1 million as of September 30, 2011 and $522.6 million as of March 31, 2012. As of those dates, long-term debt consisted of the following:

(in thousands)	September 30, 2011			March 31,2012
7-5/8% Senior secured notes, due April 2019	$	400,000		$	400,000
Convertible senior subordinated notes:
16%, due 2016 with put date of June 2012 (face amount $9,233), net of discount	9,014			9,178
2.50%, due 2014 (face amount $120,900 at September 30, 2011 and $113,400 at March 31, 2012), net of discount	106,688			102,787
14.75% (face amount $12,965), net of discount	12,101			0
Total convertible senior subordinated notes, net of applicable discounts	127,803			111,965
	527,803			511,965
Less current portion	(9,014		)	(9,178		)
Carrying amount of long-term debt, net of discounts	$	518,789		$	502,787

7-5/8% Senior Secured Notes — In March 2011, Headwaters issued $400.0 million of 7-5/8% senior secured notes for net proceeds of approximately $392.8 million. Headwaters used most of the net proceeds to repay the former 11-3/8% senior secured notes and the related early repayment premium of approximately $59.0 million (which premium was charged to interest expense). The 11-3/8% notes were issued at a discount which was being amortized to interest expense over the original term of the debt. Upon early repayment in March 2011, the remaining unamortized balances of approximately $2.2 million of debt discount and $6.6 million of debt issue costs were written off and charged to interest expense, as was $1.1 million of banking fees related to the tender offer.

The 7-5/8% notes mature in April 2019 and bear interest at a rate of 7.625%, payable semiannually. The notes are secured by substantially all assets of Headwaters; however, the note holders have a second priority position with respect to the assets that secure the ABL Revolver, currently consisting of certain trade receivables and inventories of Headwaters’ light building products and heavy construction materials segments. The notes are senior in priority to all other outstanding and future subordinated debt.

Headwaters can redeem the 7-5/8% notes, in whole or in part, at any time after March 2015 at redemption prices ranging from 103.8% to 100.0%, depending on the redemption date. In addition, through March 2014 Headwaters can redeem at a price of 107.6% up to 35% of the outstanding notes with the net proceeds from one or more equity offerings. Headwaters can also redeem up to 10% of the notes in any 12-month period through March 2014 at a price of 103%, and can redeem any portion of the notes at any time through March 2015 at a price equal to 100% plus a make-whole premium.

The senior secured notes limit Headwaters in the incurrence of additional debt and liens on assets, prepayment of future subordinated debt, merging or consolidating with another company, selling all or substantially all assets, making investments and the payment of dividends or distributions, among other things. Headwaters was in compliance with all debt covenants as of March 31, 2012.

ABL Revolver — Since entering into the ABL Revolver, Headwaters has not borrowed any funds under the terms of the ABL Revolver and has no borrowings outstanding as of March 31, 2012. Availability under the ABL Revolver cannot exceed $70.0 million, which includes a $35.0 million sub-line for letters of credit and a $10.5 million swingline facility. Availability under the ABL Revolver is further limited by the borrowing base valuations of the assets of Headwaters’ light building products and heavy construction materials segments which secure the borrowings, currently consisting of certain trade receivables and inventories. In addition to the first lien position on these assets, the ABL Revolver lenders have a second priority position on substantially all other assets of Headwaters. During the 2011 fiscal year, Headwaters secured a letter of credit under terms of the ABL Revolver for approximately $16.1 million in order to post bond in connection with the filing of an appeal in the Boynton matter described in Note 12. As of March 31, 2012, availability under the ABL Revolver was approximately $43.5 million.

Outstanding borrowings under the ABL Revolver accrue interest at Headwaters’ option, at either i) the London Interbank Offered Rate (LIBOR) plus 2.25%, 2.50% or 2.75%, depending on Headwaters’ fixed charge coverage ratio; or ii) the “Base Rate” plus 1.0%, 1.25% or 1.5%, again depending on the fixed charge coverage ratio. The base rate is subject to a floor equal to the highest of i) the prime rate, ii) the federal funds rate plus 0.5%, and iii) the 30-day LIBOR rate plus 1.0%. Fees on the unused portion of the ABL Revolver range from 0.25% to 0.50%, depending on the amount of the credit facility which is utilized. If there would have been borrowings outstanding under the ABL Revolver as of March 31, 2012, the interest rate on those borrowings would have been approximately 3.2%. The ABL Revolver terminates three months prior to the earliest maturity date of the senior secured notes or any of the convertible senior subordinated notes, but no later than October 2014, at which time any amounts borrowed must be repaid.

The ABL Revolver contains restrictions and covenants common to such agreements, including limitations on the incurrence of additional debt and liens on assets, prepayment of subordinated debt, merging or consolidating with another company, selling assets, making capital expenditures, making acquisitions and investments and the payment of dividends or distributions, among other things. In addition, if availability under the ABL Revolver is less than a specified percentage (15%), Headwaters is required to maintain a monthly fixed charge coverage ratio of at least 1.0x for the preceding twelve-month period. Headwaters was in compliance with all covenants as of March 31, 2012.

Convertible Senior Subordinated Notes — The Form 10-K includes a detailed description of all of Headwaters’ convertible senior subordinated notes.

In November 2010, Headwaters repurchased and canceled approximately $10.0 million in aggregate principal amount of the 16% notes. Terms of repayment included premiums totaling approximately $1.7 million, which were recorded as interest expense. Accelerated debt discount and debt issue costs aggregating approximately $0.6 million were also charged to interest expense. Headwaters may redeem at par any portion of the 16% notes on or after June 4, 2012. In addition, the holders of the notes have the right to require Headwaters to repurchase all or a portion of the notes on June 1, 2012 or if a fundamental change in common stock occurs, including termination of trading. These notes have been classified as current in the accompanying consolidated balance sheets.

In the December 2011 quarter, Headwaters repurchased and canceled $7.5 million in aggregate principal amount of the 2.50% notes for cash consideration of approximately $5.5 million. The $2.0 million gain was recorded in other income. Accelerated debt discount and debt issue costs aggregating approximately $0.9 million were charged to interest expense. In the March 2012 quarter, Headwaters repurchased and canceled nearly all of the remaining outstanding balance of the 14.75% notes. Terms of repayment included premiums of approximately $1.6 million. Accelerated debt discount and debt issue costs aggregating approximately $0.7 million were charged to interest expense.

Interest and Debt Maturities — During the March 2011 and 2012 quarters, Headwaters incurred total interest costs of approximately $82.7 million and $13.5 million, respectively, including approximately $11.2 million and $2.8 million, respectively, of non-cash interest expense. During the six months ended March 31, 2011 and 2012, Headwaters incurred total interest costs of approximately $99.6 million and $26.1 million, respectively, including approximately $14.5 million and $5.9 million, respectively, of non-cash interest expense and approximately $0 and $0.1 million, respectively, of interest costs that were capitalized. Interest expense for both the March 2011 quarter and the six months ended March 31, 2011 includes approximately $59.0 million of early repayment premium related to the retirement of the 11-3/8% senior secured notes in March 2011.

Interest income was approximately $0.1 million and $0 in the March 2011 and 2012 quarters, respectively, and $0.1 million for both the six months ended March 31, 2011 and 2012. The weighted-average interest rate on the face amount of outstanding long-term debt, disregarding amortization of debt discount and debt issue costs, was approximately 6.8% at September 30, 2011 and 6.7% at March 31, 2012.

There are currently no maturities of debt prior to 2014, unless the holders of the 16% convertible senior subordinated notes exercise their put option in June 2012, or thereafter Headwaters calls the notes for redemption.