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Debt
 9 Months Ended
Sep. 30, 2022
Debt Disclosure [Abstract]  
Debt
Note 5. Debt
Senior Unsecured Notes
On February 10, 2021, Terra BDC issued $34.8 million in aggregate principal amount of 7.00% fixed-rate notes due 2026, for net proceeds of $33.7 million after deducting underwriting commissions of $1.1 million. On February 26, 2021, the underwriters exercised the option to purchase an additional $3.6 million of the notes for net proceeds of $3.5 million, after deducting underwriting commissions of $0.1 million. Interest on the notes is paid quarterly in arrears every March 30, June 30, September 30 and December 30, at a rate of 7.00% per year, beginning June 30, 2021. The notes mature on March 31, 2026. The notes may be redeemed in whole or in part at any time or from time to time at Terra BDC’s option on or after February 10, 2023. In connection with the issuance of the notes, Terra BDC incurred deferred financing costs totaling $1.0 million, to be amortized to interest expense over the term of the notes.
On October 1, 2022 in connection with the Merger, Terra BDC, Terra LLC and U.S. Bank National Association entered into a second supplemental indenture pursuant to which Terra LLC assumed the payment of the notes and the performance of every covenant of the indenture, to be performed or observed by Terra BDC.
The Indenture between Terra BDC and the trustee contained certain debt limitations and asset coverage covenants. As of September 30, 2022 and December 31, 2021, Terra BDC was in compliance with the asset coverage ratio requirements under the Indenture.
For the three and nine months ended September 30, 2022 and 2021, the components of interest expense were as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Stated interest expense$671,563 $671,564 $2,014,687 $1,716,216 
Amortization of issue discount53,016 43,772 155,787 135,750 
Amortization of financing costs43,921 18,275 129,064 88,524 
Total interest expense$768,500 $733,611 $2,299,538 $1,940,490 
Weighted average debt outstanding$38,375,000 $38,375,000 $38,375,000 $32,539,835 
Cash paid for interest expense$671,563 $671,564 $2,014,687 $1,716,216 
Stated interest rate7.00 %7.00 %7.00 %7.00 %
Effective interest rate (1)
7.63 %7.63 %7.63 %7.63 %
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(1)The effective interest rate of the debt component is equal to the stated interest rate plus the amortization of issue discount.
Term Loan
On April 9, 2021, Terra BDC, as borrower, entered into a credit agreement (the “Credit Agreement”) with Eagle Point Credit Management LLC, as the administrative agent and collateral agent (“Eagle Point”), and certain funds and accounts managed by Eagle Point, as lenders (in such capacity, collectively, the “Lenders”). The Credit Agreement provides for (i) a delayed draw term loan to Terra BDC of $25.0 million (the “Term Loan”) and (ii) additional incremental loans in a minimum amount of $1.0 million and multiples of $0.5 million in excess thereof, which may be approved by a Lender in its sole discretion (“Incremental Loans,” and together with the Term Loan, the “Loans”).
The scheduled maturity date of the Loans was April 9, 2025. The Loans bear interest on the outstanding principal amount thereof at a rate equal to 5.625% per annum; provided that if at any time Terra BDC was rated below investment grade, the interest rate would increase to 6.625% until the rating is no longer below investment grade. In connection with the entry into the Credit Agreement, Terra BDC also agreed to pay Eagle Point an upfront fee in an amount equal to 2.50% of the loan commitment amount on the initial borrowing date as described in the Credit Agreement. Terra BDC also paid, with respect to any unused portion of the Term Loan, a commitment fee of 0.75% per annum.
In connection with entering into the Credit Agreement, Terra BDC incurred deferred financing costs totaling $0.3 million, to be amortized to interest expense over the term of the Term Loan. On August 31, 2021, Terra BDC made an initial draw on the Term Loan of $5.0 million and incurred an upfront fee of $0.6 million, which was deducted from proceeds from borrowings under the Term Loan. The discount is amortized to interest expense over the term of the Term Loan. For the nine months ended September 30, 2022, Terra BDC drew down an additional $20.0 million on the Term loan. As of September 30, 2022 and December 31, 2021, the amount outstanding under the Term Loan was $25.0 million and $5.0 million, respectively.
Terra BDC could prepay any Loan, in whole or in part, together with all accrued but unpaid interest thereon, upon at least 30 but not more than 60 days’ prior notice to the Agent. If Terra BDC elected to make such prepayments prior to October 9, 2023, Terra BDC would also be required to pay a make whole premium, being the present value at such date of (1) the principal amount being prepaid of such Loan, plus (2) all remaining required interest payments due on the principal amount being prepaid of such Loan through the maturity date (excluding accrued but unpaid interest to the date on which the make whole premium becomes owed), computed using a discount rate equal to the applicable U.S. Treasury rate (as set forth in the Credit Agreement) plus 50 basis points, over (B) the principal amount being prepaid of such Loan; provided that the make whole premium may in no event be less than zero.
In connection with its entry into the Credit Agreement, Terra BDC also entered into a security agreement (the “Security Agreement”), by and among Terra BDC, as grantor, and Eagle Point, as administrative agent, for the benefit of the Lenders, their affiliates and Eagle Point as the secured parties thereunder. Pursuant to the Security Agreement, Terra BDC pledged
substantially all of its now owned and hereafter acquired property as security for the obligations of Terra BDC under the Credit Agreement, subject to certain limitations and restrictions set forth in the Security Agreements.
The Credit Agreement contains customary representations, warranties, reporting requirements, borrowing conditions and affirmative, negative and financial covenants, including REIT status requirements and minimum asset coverage ratio requirements. As of September 30, 2022 and December 31, 2021, Terra BDC was in compliance with these covenants. The Credit Agreement also includes usual and customary events of default and remedies for credit agreements of this nature. Events of default under the Credit Agreement include, but are not limited to: (i) the failure by Terra BDC to make any payments when due under the Credit Agreement; (ii) the failure of Terra BDC to perform or observe any term, covenant or agreement under the Credit Agreement or any other loan document, subject to applicable cure periods; (iii) an event of default on other material indebtedness of Terra BDC; (iv) the bankruptcy or insolvency of Terra BDC; and (v) judgments and attachments, with customary limits and grace periods, against Terra BDC or its property. In addition, the Loans are subject to mandatory prepayment, at the option of each Lender, upon a change in control of Terra BDC (as defined by the Credit Agreement).
On September 27, 2022, Terra BDC, Terra LLC and Eagle Point and the Lenders entered into a Consent Letter and Amendment (the “Credit Facility Amendment”) effective October 1, 2022. Pursuant to the Credit Facility Amendment, (i) Eagle Point and the Lenders consented to the consummation of the Merger and the assumption by Terra LLC of all of the obligations of Terra BDC under the Credit Agreement, (ii) and the Credit Agreement was amended to, among other things, change the scheduled maturity date to July 1, 2023, and remove the make whole premium on voluntary prepayments of the loans.
For the three and nine months ended September 30, 2022 and 2021, the components of interest expense were as follows:
Three Months Ended September 30,Nine Months Ended September 30,
2022202120222021
Stated interest expense$359,376 $23,438 $909,454 $23,438 
Amortization of issue discount41,925 14,205 117,506 14,205 
Amortization of financing costs18,215 18,995 53,910 35,926 
Unused fee— 44,792 20,927 87,500 
Total interest expense$419,516 $101,430 $1,101,797 $161,069 
Weighted average debt outstanding$25,000,000 $1,684,783 $21,390,110 $567,766 
Cash paid for interest expense$359,376 $68,230 $930,381 $110,938 
Stated interest rate5.625 %5.625 %5.625 %5.625 %
Effective interest rate (1)
6.25 %6.25 %6.25 %6.25 %
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(1)The effective interest rate of the debt component is equal to the stated interest rate plus the amortization of issue discount.