

9.		DEBT

Long-term debt is comprised of the following (in thousands):



	At
	January 1, 2016			January 2, 2015
Senior secured term loan A	$	375,000		$	—
Senior secured term loan B	1,025,000			—
9.125% senior notes, due 2023	360,000			—
Variable rate term loan	—			187,500
Revolving line of credit	—			—
Less unamortized discount on term loan B and debt issuance costs	(45,947		)	(887		)
Total debt	1,714,053			186,613
Less current portion of long-term debt	29,000			11,250
Total long-term debt	$	1,685,053		$	175,363

Senior Secured Credit Facilities – In connection with the Lake Region Medical acquisition, on October 27, 2015, the Company replaced its existing credit facility with new senior secured credit facilities (the “Senior Secured Credit Facilities”) consisting of (i) a $200 million revolving credit facility (the “Revolving Credit Facility”), (ii) a $375 million term loan A facility (the “TLA Facility”), and (iii) a $1,025 million term loan B facility (the “TLB Facility”). The TLA Facility and TLB Facility are collectively referred to as the “Term Loan Facilities.” The TLB facility was issued at a 1% discount.

Term Loan Facilities

The TLA Facility and TLB Facility mature on October 27, 2021 and October 27, 2022, respectively. Interest rates on the TLA Facility, as well as the Revolving Credit Facility, are at the Company’s option, either at: (i) the prime rate plus the applicable margin, which will range between 0.75% and 2.25%, based on the Company’s Total Net Leverage Ratio, as defined in the Senior Secured Credit Facilities agreement or (ii) the applicable LIBOR rate plus the applicable margin, which will range between 1.75% and 3.25%, based on the Company’s Total Net Leverage Ratio. Interest rates on the TLB Facility are, at the Company’s option, either at: (i) the prime rate plus 3.25% or (ii) the applicable LIBOR rate plus 4.25%, with LIBOR subject to a 1.00% floor.

Subject to certain conditions, one or more incremental term loan facilities may be added to the Term Loan Facilities so long as, on a pro forma basis, the Company’s first lien net leverage ratio does not exceed 4.25:1.00.

As of January 1, 2016, the estimated fair value of TLB is $1,013 million, based on quoted market prices for the debt, recent sales prices for the debt and consideration of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as Level 2 measurements within the fair value hierarchy. The par amount of TLA approximated its fair value as of January 1, 2016 based upon the debt being variable rate in nature.

Revolving Credit Facility

The Revolving Credit Facility matures on October 27, 2020. The Revolving Credit Facility also includes a $15 million sublimit for swingline loans and a $30 million sublimit for standby letters of credit (which will subsequently decrease to $25 million on April 27, 2016). The Company is required to pay a commitment fee on the unused portion of the Revolving Credit Facility, which will range between 0.175% and 0.25%, depending on the Company’s Total Net Leverage Ratio. As of January 1, 2016, there were no borrowings on the Revolving Credit Facility, but available borrowing capacity was $186.6 million after giving effect to $13.4 million of outstanding standby letters of credit.

Subject to certain conditions, commitments under the Revolving Credit Facility may be increased through an incremental revolving facility so long as, on a pro forma basis, the Company’s first lien net leverage ratio does not exceed 4.25:1.00.

Covenants

The Revolving Credit Facility and the TLA Facility contain covenants requiring (A) a maximum Total Net Leverage Ratio of 6.50:1.00, subject to step downs and (B) a minimum interest coverage ratio of adjusted EBITDA (as defined in the Senior Secured Credit Facilities) to interest expense of not less than 3.00:1.00. The TLB Facility does not contain any financial maintenance covenants.

The Senior Secured Credit Facilities also contain negative covenants that restrict the Company’s ability to (i) incur additional indebtedness; (ii) create certain liens; (iii) consolidate or merge; (iv) sell assets, including capital stock of the Company’s subsidiaries; (v) engage in transactions with the Company’s affiliates; (vi) create restrictions on the payment of dividends or other amounts to Greatbatch Ltd. from the Company’s restricted subsidiaries; (vii) pay dividends on capital stock or redeem, repurchase or retire capital stock; (viii) pay, prepay, repurchase or retire certain subordinated indebtedness; (ix) make investments, loans, advances and acquisitions; (x) make certain amendments or modifications to the organizational documents of the Company or its subsidiaries or the documentation governing other senior indebtedness of the Company; and (xi) change the Company’s type of business. These negative covenants are subject to a number of limitations and exceptions that are described in the Senior Secured Credit Facilities agreement. As of January 1, 2016, the Company was in compliance with all financial and negative covenants under the Senior Secured Credit Facilities.

The Senior Secured Credit Facilities provide for customary events of default. Upon the occurrence and during the continuance of an event of default, the outstanding advances and all other obligations under the Senior Secured Credit Facilities become immediately due and payable. The Senior Secured Credit Facilities are guaranteed by the Company, as a parent guarantor, and all of the Company’s present and future direct and indirect wholly-owned domestic subsidiaries (other than Greatbatch Ltd., non-wholly owned joint ventures and certain other excluded subsidiaries). The Senior Secured Credit Facilities are secured, subject to certain exceptions, by a first priority security interest in; 1) the present and future shares of capital stock of (or other ownership or profit interests in) Greatbatch Ltd. and each guarantor (except the Company); 2) sixty-six percent (66%) of all present and future shares of voting capital stock of each specified first-tier foreign subsidiary; 3) substantially all of the Company’s, Greatbatch Ltd.’s and each other guarantor’s other personal property; and 4) all proceeds and products of the property and assets of the Company, Greatbatch Ltd. and the other guarantors.

9.125% Senior Notes due 2023 – On October 27, 2015, the Company completed a private offering of $360 million aggregate principal amount of 9.125% senior notes due on November 1, 2023 (the “Senior Notes”). All the Senior Notes are outstanding as of January 1, 2016.

Interest on the Senior Notes is payable on May 1 and November 1 of each year, beginning on May 1, 2016. The Company may redeem the Senior Notes, in whole or in part, prior to November 1, 2018 at a price equal to 100% of the principal amount thereof plus a “make-whole” premium. Prior to November 1, 2018, the Company may redeem up to 40% of the aggregate principal amount of the Senior Notes using the proceeds from certain equity offerings at a redemption price equal to 109.125% of the aggregate principal amount of the Senior Notes. As of January 1, 2016, the estimated fair value of the Senior Notes are $354.6 million, based on quoted market prices of these notes, recent sales prices for the notes and consideration of comparable debt instruments with similar interest rates and trading frequency, among other factors, and is classified as Level 2 measurements within the fair value hierarchy.

The Senior Notes are senior unsecured obligations of the Company. The Senior Notes contain restrictive covenants that, among other things, limit the ability of the Company to: (i) incur or guarantee additional indebtedness or issue certain disqualified stock or preferred stock; (ii) create certain liens; (iii) pay dividends or make distributions in respect of capital stock; (iv) make certain other restricted payments; (v) enter into agreements that restrict certain dividends or other payments; (vi) enter into sale-leaseback agreements; (vii) engage in certain transactions with affiliates; and (viii) consolidate or merge with, or sell substantially all of their assets to, another person. These covenants are subject to a number of limitations and exceptions that are described in the indenture agreement of the Senior Notes. The Senior Notes provide for customary events of default, subject in certain cases to customary cure periods, in which the Senior Notes and any unpaid interest would become due and payable.

As of January 1, 2016, the weighted average interest rate on all outstanding borrowings is 5.69%.

Contractual maturities of the Company’s debt facilities for the next five years and thereafter, excluding any discounts or premiums, as of January 1, 2016 are as follows (in thousands):



2016	$	29,000
2017	31,344
2018	40,719
2019	47,750
2020	47,750
Thereafter	1,563,437
Total	$	1,760,000

Interest Rate Swaps – From time to time, the Company enters into interest rate swap agreements in order to hedge against potential changes in cash flows on its outstanding variable rate debt. During 2012, the Company entered into a three-year $150 million interest rate swap, which amortized $50 million per year. During 2014, the Company entered into an additional interest rate swap. The first $45 million of notional amount of the swap was effective February 20, 2015, and the second $45 million of notional amount was scheduled to be effective February 22, 2016. These swaps were accounted for as cash flow hedges. As a result of the Lake Region Medical acquisition, the forecasted cash flows that the Company’s interest rate swaps were hedging were no longer expected to occur. Accordingly, during 2015, the Company recognized an additional $2.8 million charge in Interest Expense relating to the termination of the interest rate swap contracts. On October 27, 2015, the Company terminated its outstanding interest rate swap agreements resulting in a $2.8 million payment to the interest rate swap counterparty. As of January 1, 2016, the Company has no interest rate swap agreements outstanding. No portion of the change in fair value of the Company’s interest rate swaps during 2015, 2014, or 2013 were considered ineffective. The amount recorded as Interest Expense during 2015, 2014, and 2013 related to the Company’s interest rate swaps was $3.5 million, $0.5 million and $0.5 million, respectively.

Convertible Subordinated Notes – In March 2007, the Company issued $197.8 million of CSN at a 5% discount. CSN accrued interest at 2.25% per annum. The effective interest rate of CSN, which took into consideration the amortization of the discount and deferred fees related to the issuance of these notes, was 8.5%. On February 20, 2013, the Company redeemed all outstanding CSN. The contractual interest and discount amortization for CSN were as follows (in thousands):



	Year Ended
	January 1, 2016		January 2, 2015		January 3, 2014
Contractual interest	$	—	$	—	$	634
Discount amortization	—		—		5,368

Debt Issuance Costs and Discounts – In conjunction with the issuance of the Senior Secured Credit Facilities and the Senior Notes, the Company incurred $45.9 million of debt issuance costs. As stated in Note 1, the Company has elected to early-adopt ASU 2015-03, “Simplifying the Presentation of Debt Issuance Costs.” Following this ASU, unamortized debt issuance costs of $35.9 million and $0.9 million have been recorded as a reduction of the carrying value of the related debt as of January 1, 2016 and January 2, 2015, respectively. Additionally, as of January 1, 2016 and January 2, 2015, $4.8 million and $2.2 million, respectively, of debt issuance costs attributable to the Company’s revolving credit facilities remain recorded as a component of Other Assets on the Consolidated Balance Sheets. These costs will amortize into Interest Expense over the terms of the related credit facilities.

The change in deferred debt issuance costs related to the Company’s revolving credit facilities is as follows (in thousands):



At January 3, 2014	$	2,786
Amortization during the period	(586		)
At January 2, 2015	2,200
Financing costs deferred	4,152
Write-off during the period	(907		)
Amortization during the period	(654		)
At January 1, 2016	$	4,791

The change in unamortized discount and debt issuance costs related to the Term Loan Facilities and Senior Notes is as follows (in thousands):



	Debt Issuance Costs			Unamortized Discount on TLB Facility			Total
At January 3, 2014	$	1,074		$	—		$	1,074
Amortization during the period	(187		)	—			(187		)
At January 2, 2015	887			—			887
Financing costs incurred	41,781			10,250			52,031
Write-off during the period	(732		)	—			(732		)
Amortization during the period	(6,028		)	(211		)	(6,239		)
At January 1, 2016	$	35,908		$	10,039		$	45,947

During 2015, the Company wrote off $1.6 million of debt issuance costs in connection with the extinguishment and modification of its term loan and revolving line of credit, respectively, which is included in Interest Expense on the Consolidated Statements of Operations.