CREDIT AGREEMENT AND RELATED INSTRUMENTS

Credit Agreement

We are a party to a senior secured credit facility with Morgan Stanley Senior Funding, Inc. (“MSSF”) consisting of a term loan facility and a $50.0 million revolving credit facility. As of September 29, 2013, we had $676.0 million in term loan borrowings and no borrowings under the revolving credit facility. We can also request the establishment of one or more swingline loans and/or revolving credit facilities with commitments in an aggregate amount not to exceed $200.0 million.

During the quarter ended March 31, 2013, we entered into Amendment No. 4 to our Credit Agreement dated as of November 2, 2010 with MSSF and the lenders referred to therein (as amended, the “Credit Agreement”). The amendment extended the term loan maturity date, provided new pricing terms, including reducing the interest rate on our term loan to 3.75%, and modified certain financial covenant provisions such that they are not scheduled to be reported unless we have revolving or swingline loan balances outstanding at the end of a fiscal quarter. We accounted for the fourth amendment as a debt modification with respect to amounts that remained in the syndicate and a debt extinguishment with respect to the $277.5 million that exited the syndicate and recorded debt extinguishment expense of $3.0 million. The amendment did not impact the net principal balance outstanding.

Under the Credit Agreement, we may borrow under a Base Rate which approximates the prime rate or Eurodollar Rate which approximates LIBOR. In the case of term loans, the Eurodollar Rate will not be lower than 1.00%. The applicable interest rate margin per annum for each type of loan at September 29, 2013 is as follows:



	Base Rate	Eurodollar Rate
Revolving and swingline loans	3.50%	4.50%
Term loans	1.75%	2.75%

As of September 29, 2013, term loan borrowings were under the Eurodollar Rate and subject to an interest rate of 3.75%. The fair value of our term loan balance was $674.3 million and we classify this valuation as a Level 2 fair value measurement.

The amended term loan facility matures in February 2020 and principal amortizes at $7.3 million per year. During the fiscal year ended September 29, 2013, we completed optional principal prepayments of $100.0 million. While there are currently no scheduled principal repayments until the maturity date, the Credit Agreement stipulates an annual payment of a percentage of Excess Cash Flow (“ECF”). The ECF percentage is between 0% and 50% depending on our consolidated leverage ratio as of the end of a fiscal year.

We currently pay an undrawn commitment fee of 3.75% on the unused portion of the revolving facility. If any letters of credit are issued, then we expect to pay a fronting fee equal to 0.25% per annum of the aggregate face amount of each letter of credit and a participation fee on all outstanding letters of credit at a per annum rate equal to the margin then in effect with respect to Eurodollar Rate-based loans on the face amount of such letter of credit.

The Credit Agreement includes financial covenants requiring a maximum leverage ratio and minimum fixed charge coverage ratio that are applicable only when revolving loans or swingline loans are outstanding at the end of a fiscal quarter and also contains other customary affirmative and negative covenants and events of default. We were in compliance with our covenants as of September 29, 2013.

Interest Rate Swap Agreements

In connection with the original Credit Agreement in November 2010, we entered into interest rate swap agreements for the purpose of minimizing the variability of cash flows in the interest rate payments of our variable rate borrowings. The cash flows received under the interest rate swap agreements are expected to offset the change in cash flows associated with LIBOR rate borrowings between the effective and maturity dates of the swaps. Our two swap agreements have notional amounts, fixed rates and expiration dates as follows: $121.0 million at 1.83% expiring January 2014 and $24.0 million at 2.21% expiring January 2015. We classify our interest rate swap balances as Level 2 fair value measurements. We determined the fair value of our interest rate swap agreements based on mid-market valuations reported to us by the counterparty to the swap agreements. Related to these interest rate swap agreements, we recorded a current liability of $0.3 million and a long-term liability of $0.4 million as of September 29, 2013 and a long-term liability of $1.9 million as of September 30, 2012. We reflect the change in fair value of the swaps through other income (expense), net and recorded income of $1.3 million in 2013 and income of $0.9 million in 2012.

Fair Value Option

We elected the fair value option in accounting for the term loan balance outstanding as of October 2, 2011 and determined the fair value to be $361.0 million compared to a par value of $372.2 million. We did not elect the fair value option subsequent to entering into Amendment No. 2 to the Credit Agreement and recorded an extinguishment expense of $11.2 million in other income (expense), net during 2012.

Foreign Currency Forward

In connection with the acquisition of Zarlink, we entered into a foreign currency forward agreement in the fourth quarter of 2011 to minimize our foreign currency risk associated with the transaction that we funded in Canadian Dollars (“CAD”). We agreed to purchase CAD 623.0 million for $608.2 million that settled in October 2011. We classified interest rate forward balances as Level 1 fair value measurements where there are quoted prices in active markets for identical instruments. We determined the fair value of our foreign currency forward agreement based on a corresponding quote from the counterparty to the forward transaction. As the foreign currency forward contract did not qualify for hedge accounting, we reflected the change in fair value of the swap through other income (expense), net. At October 2, 2011, we recorded a current liability and corresponding expense of $11.7 million for the change in fair value. During the quarter ended January 1, 2012, we recorded income of $15.4 million related to the settlement of this forward. As our only foreign currency forward agreement settled in the quarter ended January 1, 2012, we did not record a fair value adjustment subsequent to the quarter ended January 1, 2012.