DEBT

6 Months Ended

Jun. 30, 2012

DEBT

DEBT

12.DEBT

The Company has the following debt issued and outstanding:

	Successor Company
	June 30, 2012		December 31, 2011
Existing Notes	$	325,000	$	325,000
Revolving Credit Facility	—		40
	$	325,000	$	325,040

(a) Existing Notes

The Existing Notes of $325 million were issued on May 12, 2011 and are due on December 1, 2013. The Existing Notes bear interest at an annual rate of LIBOR (London Interbank Offered Rate) plus 3.75%, subject to a LIBOR floor of 1.25%. The interest rate resets quarterly and is payable in arrears on March 1, June 1, September 1, and December 1 of each year. The Existing Notes are unsecured senior obligations, which are guaranteed by certain of the Successor Company’s subsidiaries, and rank equally in right of payment to all existing and future senior indebtedness other than debt incurred under the Revolving Credit Facility. In addition, as described below, the Existing Notes are secured by second liens. The guarantees of the guarantor subsidiaries are unconditional, joint and several. Under the terms of the indenture governing the Existing Notes dated May 12, 2011 among Angiotech, the guarantors party thereto and Deutshe Bank National Trust Company as trustee (the “Existing Notes Indenture”) and subject to certain conditions, the holders of the Existing Notes have been granted a security interest in the form of a second lien over the Successor Company and certain of its subsidiaries’ property, assets and undertakings that secure the Revolving Credit Facility.

On July 3, 2012, Angiotech launched an offer to exchange up to a maximum of $200 million in aggregate principal amount of the outstanding Existing Notes for new 9% Senior Notes due December 1, 2016 issued by Angiotech Pharmaceuticals (US), Inc. pursuant to an Offering Memorandum and Consent Solicitation Statement. On July 27, 2012, as a result of significant demand for New Notes by holders of the Existing Notes, Angiotech elected to amend the Exchange Offer to increase the Maximum Principal Exchange Amount to $225 million.  On August 13, 2012, $225 million of the $255.5 million tendered Existing Notes were irrevocably extinguished and exchanged, on a pro rata basis, for approximately $230 million of New Notes.  All Existing Notes were tendered by the prescribed July 23, 2012 early tender date and, therefore, received the New Notes with a principal amount constituting a 2% premium to the principal amount of the Existing Notes so exchanged.

Aside from the higher rate of interest and extended maturity date, the New Notes were issued pursuant to an indenture (the “New Notes Indenture”) on substantially the same terms and conditions as the Existing Notes Indenture, except for the following:

·The Existing Notes were issued by Angiotech and guaranteed by Angiotech US and certain other subsidiaries.  The New Notes were issued by Angiotech US, and are guaranteed by Angiotech and certain of its subsidiaries.

·The New Notes are redeemable at Angiotech US’s option at any time, in whole or in part, at a redemption price equal to the principal amount thereof, plus any accrued and unpaid interest thereon to the applicable redemption date and any outstanding fees, expenses or other amounts owing in respect thereof. However, the redemption is subject to the condition that all Existing Notes then outstanding, if any, must be concurrently redeemed under the Existing Notes Indenture.

·The covenants restricting incurrence of Indebtedness were modified to prohibit the incurrence of Indebtedness based on the Fixed Charge Coverage Ratio and limit the amount of Permitted Refinancing Indebtedness that can be secured with Permitted Liens.

·Provided that no Default or Event of Default has occurred, under the New Notes Indenture, Angiotech has the option to prepay the outstanding Existing Notes in whole or in part prior to making any principal payments on the New Notes.

If a change in control occurs in the future, Angiotech will be required to offer to repurchase the New Notes at a price equal to 101% of the principal amount thereof, plus any accrued and unpaid interest, if any, to the date of repurchase.

Subject to certain exceptions, the New Notes and the Guarantors’ guarantees of the New Notes are secured, ratably with the Existing Notes, by second-priority liens and security interests over the same collateral that currently or in the future secures the obligations owing under the Successor Company’s Revolving Credit Facility, Hedging Obligations and cash management obligations. The New Notes are senior secured obligations, which are fully, joint and severally, and unconditionally guaranteed by Angiotech’s existing and future subsidiaries which may guarantee any of its other indebtedness.

In connection with the Exchange Offer, the Successor Company also received consents from the holders of the Existing Notes to amend the Existing Notes Indenture dated May 12, 2011 to provide for, among other things, the New Notes and Existing Notes to vote together as a single class on certain matters.

Under the terms of the Existing Notes Indenture and New Notes Indenture, an event of default would permit the holders of the Existing Notes to exercise their right to demand immediate repayment of the Successor Company’s debt obligations owing thereunder. In the event that this occurred and the Successor Company was unable to refinance the Existing Notes, the Successor Company’s current cash and credit capacity may not be sufficient to service its principal debt and interest obligations. In addition, restrictions on the Successor Company’s ability to borrow and the possible accelerated demand of repayment of existing or future obligations by any of its creditors may jeopardize its working capital position and ability to sustain future operations.

In addition, under the terms of the Existing Notes Indenture, should the Company not find a qualified alternative use for the $20 million of proceeds from the transaction with Ethicon described in note 11(b), the Company may be required to make a bona fide offer to holders of the Existing Notes to repurchase up to an equivalent amount of outstanding notes by October 4, 2012.

(b) Covenants

The Existing Notes Indenture contains various covenants which impose restrictions on the operation of the Successor Company’s business and the business of its subsidiaries, including the incurrence of certain liens and additional indebtedness. Material covenants under this indenture: specify maximum or permitted amounts for certain types of capital transactions; impose certain restrictions on asset sales, the use of proceeds and the payment of dividends by the Successor Company; and requires that all outstanding principal amounts and interest accrued and unpaid become due and payable upon the occurrence of a defined event of default.

The proposed New Notes Indenture discussed above contains similar covenants that will, among other things, limit the Successor Company’s ability to incur, assume or guarantee additional indebtedness or issue preferred stock; pay dividends or make other equity distributions; purchase or redeem capital stock; make certain investments; create liens; sell or dispose of assets; engage in transactions with affiliates; and merge or consolidate with another entity or transfer substantially all of the Successor Company’s assets.

In addition, the Revolving Credit Facility described below includes certain customary affirmative and negative covenants, which limit the Successor Company’s ability to, among other things, incur indebtedness, create liens, merge or consolidate, sell or dispose of assets, change the nature of its business, make distributions or advances, loans or investments. The Revolving Credit Facility also requires the Successor Company to comply with a specified minimum adjusted earnings before income taxes, depreciation and amortization (“Adjusted EBITDA”) and fixed charge coverage ratio as well as maintain $15.0 million in Excess Availability plus Qualified Cash (as defined under the Revolving Credit Facility), of which Qualified Cash must be at least $5.0 million. In addition, in the event that the aggregate amount of cash and cash equivalents of the parent company and its subsidiaries exceeds $20 million at any time, the Successor Company is required to immediately prepay the outstanding principal amount of the advances until paid in full in an amount equal to such excess. The Revolving Credit Facility contains certain customary events of default including but not limited to those for failure to comply with covenants, commencement of insolvency proceedings and defaults under the Successor Company’s other indebtedness. As described in note 12(e) below, the Successor Company entered into an amendment to its Revolving Credit Facility on March 12, 2012 to modify certain of these covenants and other conditions to provide increased financial flexibility and improve liquidity.

(c) Interest

The Existing Notes accrue interest at LIBOR plus 3.75%, subject to a LIBOR floor of 1.25%. The effective interest rate on these notes for the three and six months ended June 30, 2012 was 5.0% and the rate in effect on June 30, 2012 was 5% (December 31, 2011 - 5.0%). The effective interest rate on these notes for the two months ended June 30, 2011 was 3.4%. The effective interest rate on these notes for one and four months ended April 30, 2011 was 3.7% and 5.5%, respectively. For the three and six months ended June 30, 2012 the Successor Company incurred interest expense of $4.1 million and $8.2 million, respectively, on the Existing Notes. For the two months ended June 30, 2011, the Successor Company incurred interest expense of $2.8 million on the Existing Notes. For the one and four months ended April 30, 2011, the Predecessor Company incurred interest expense of $1.1 million and $4.4 million on the senior floating rate notes that were in place prior to the issuance of the Existing Notes on the Plan Implementation Date.

d) Deferred Financing Costs

Deferred financing costs are capitalized and amortized to interest expense over the life of the debt instruments on a straight-line basis, which approximates the effective interest rate method. As at June 30, 2012, the Successor Company had $0.7 million of deferred financing costs recorded related to the fees that were incurred to complete the Exchange Offer and amend to the Revolving Credit Facility described in note 12(e) below. Upon implementation of fresh start accounting on April 30, 2011, the Predecessor Company’s $4.4 million of deferred financing costs, related to the Existing Floating Rate Notes and Exit Credit Facility, were fair valued to nil. As a result, the Successor Company had nil deferred financing costs as at June 30, 2011.

During the three and six months ended June 30, 2012, the Successor Company recorded nil and $0.1 million of non-cash interest expense, respectively, related to the amortization of its deferred financing costs. During the two months ended June 30, 2011 and the one and four months ended April 30, 2011, Angiotech recorded nil, $1.0 million and $3.9 million of non-cash interest expense, respectively.

e) Revolving Credit Facility

On March 12, 2012, the Successor Company completed a second amendment to its Revolving Credit Facility to provide increased financial flexibility and improve its overall liquidity. This amendment provides for, among other things: (i) the repurchase of the Successor Company’s outstanding Senior Floating Rate Notes, subject to certain terms and conditions; (ii) the repurchase of equity held by current or former employees, officers or directors subject to certain limitations; (iii) an increase in the amount of cash that can be held by the Successor Company’s foreign subsidiaries; (iv) the ability to dispose of certain of the Successor Company’s intellectual property assets (at which time the component of the borrowing base supported by such intellectual property assets would be reduced to nil); (v) a reduction in the restrictions surrounding eligibility of certain accounts receivable; (vi) the removal of the lien over the Successor Company’s short term investments; (vii) a revision to the definition of EBITDA to allow for certain historical and future restructuring and CCAA costs; and (viii) less restrictive reporting requirements when advances under the Revolving Credit Facility are below certain thresholds. During the six months ended June 30, 2012, the Successor Company incurred total fees of $0.4 million to complete this amendment.

On August 13, 2012, the Successor Company completed a third amendment to its Revolving Credit Facility to amend the covenants to allow for the completion of the Exchange Offer.

As at June 30, 2012, the Successor Company had nil borrowings outstanding under the Revolving Credit Facility (December 31, 2011 - $0.04 million), $1.7 million of letters of credit issued under the facility (December 31, 2011 - $2.6 million) and $21.1 million of remaining availability under the Revolving Credit Facility (December 31, 2011 - $21.3 million). During the three and six months ended June 30, 2012, the Successor Company incurred nil interest expense on borrowings under the Revolving Credit Facility.