Financing Arrangements

9 Months Ended

Sep. 30, 2019

Term Loans

During 2014, in order to finance its acquisitions of Hi-Tech Pharmacal Co Inc. and VersaPharm Inc., Akorn, Inc., together with certain of its subsidiaries (Akorn, Inc., together with such subsidiaries, the “Akorn Loan Parties”), entered into two term loan agreements (the “Term Loan Agreements” and the loans outstanding thereunder, the “Term Loans”) with certain lenders (the “Lenders”) and with JPMorgan Chase Bank, N.A. (“JPMorgan”), as administrative agent (the “Term Loan Administrative Agent”). The aggregate principal amount of the Term Loans was $1,045.0 million. As of September 30, 2019, outstanding debt under the Term Loan Agreements was $845.4 million. The Company believes it was in compliance with all applicable covenants in the Term Loan Agreements, which included customary limitations on indebtedness, distributions, liens, acquisitions, investments, and other activities, as of September 30, 2019. As of September 30, 2019, the Term Loans were scheduled to mature on April 16, 2021.

On May 6, 2019, the Akorn Loan Parties entered into a Standstill Agreement and First Amendment (the “Standstill Agreement”) with respect to the Term Loan Agreements with an ad hoc group of Lenders (the “Ad Hoc Group”), certain other Lenders (together with the Ad Hoc Group, the “Standstill Lenders”) and the Term Loan Administrative Agent (together with the Akorn Loan Parties and the Standstill Lenders, the “Standstill Parties”). Capitalized terms used but not defined herein have the meanings given to them in the Standstill Agreement or the Term Loan Agreements, as applicable.

The Standstill Agreement provides that, for the duration of the Standstill Period (as defined below), among other matters, neither the Term Loan Administrative Agent nor the Lenders may (i) declare any Event of Default or (ii) otherwise seek to exercise any rights or remedies, in each case of clauses (i) and (ii) above, to the extent directly relating to any alleged Event of Default arising from any alleged breach of any of the covenants contained in Sections 5.01, 5.02, 5.03, 5.06 or 5.07 of the Term Loan Agreements (the “Specified Covenants”), to the extent the facts and circumstances giving rise to any such breach have been (x) publicly disclosed by the Company or (y) disclosed in writing by the Company to private side Lenders or certain advisors to the Ad Hoc Group (collectively, the “Specified Matters”). “Standstill Period” means the period of time from the effective date of the Standstill Agreement (the “Effective Date”) through the earliest of (a) December 13, 2019; (b) the delivery of a notice of termination of the Standstill Period by Lenders holding a majority of the Term Loans (the “Required Lenders”) upon the occurrence of a Default or Event of Default under the Term Loan Agreements, excluding any Default or Event of Default relating to a Specified Matter; or (c) the delivery of a notice of termination of the Standstill Period by the Required Lenders as a result of any breach of, or non-compliance with, any provision of the Standstill Agreement by the Akorn Loan Parties, including without limitation any such breach or noncompliance by the Akorn Loan Parties of or with any Affirmative Covenants and Milestones or Negative Covenants (each as defined below) or other covenants set forth in the Standstill Agreement, subject, in each case, to any applicable cure period expressly set forth therein (each, a “Standstill Event of Default”).

In exchange for the agreement of the Lenders to standstill during the Standstill Period, the Standstill Agreement provides, among other matters, that:


•	during the Standstill Period:


◦	the Company must deliver certain financial and other reporting to the Lenders or their advisors, including monthly financial statements, 13-week cash flow forecasts and variance reports and certain regulatory information, and participate in various update calls with the Lenders and their advisors (the “Affirmative Covenants and Milestones”);

◦

the Company and its subsidiaries are restricted, among other matters, from (i) consummating certain asset sales and investments, (ii) making certain restricted payments with respect to the Company’s common stock and any subordinated indebtedness, (iii) engaging in sale and leaseback transactions, (iv) incurring certain liens and indebtedness, (v) reinvesting any proceeds received from certain asset sales, and (vi) without the consent of the Required Lenders at such time, (A) designating any Restricted Subsidiary as an Unrestricted

Subsidiary, or otherwise creating or forming any Unrestricted Subsidiary, and/or (B) transferring any assets of the Company or any of its Restricted Subsidiaries to any Unrestricted Subsidiary, except as otherwise permitted under the Term Loan Agreements (after giving effect to the Standstill Agreement) (collectively, the “Negative Covenants”);


◦	the Company must pay a fee in an amount equal to 0.625% of the outstanding principal of any Term Loans prepaid or repaid during the Standstill Period (other than as a result of any asset sale, condemnation event, incurrence of non-permitted indebtedness or excess cash flow);


◦	the Company must notify the Ad Hoc Group and/or such advisors before making certain payments in respect of judgments or settlements of ongoing litigation matters (a “Specified Litigation Payment”); and


◦	the Company must pay the fees and expenses of certain advisors to the Ad Hoc Group;


•	the Company and the Standstill Lenders must negotiate in good faith to enter into a comprehensive amendment of the Term Loan Agreements (the “Comprehensive Amendment”), which Comprehensive Amendment must be satisfactory in form and substance to the Required Lenders;


•	As of September 30, 2019, the $845.4 million outstanding principal amount of the Term Loans includes aggregate paid-in-kind fee and non-cash interest of $10.9 million and $2.6 million, respectively that are related to the Standstill Agreement.


•	the interest margins payable by the Company with respect to outstanding Term Loans (as described above) were increased on an ongoing basis by 1.50% (i.e., 150 basis points), with 0.75% (i.e., 75 basis points) of such increase payable in cash and 0.75% (i.e., 75 basis points) of such increase payable in kind.

Subject to a five business day cure period (the “Cure Period”), the Company’s failure to comply with the Affirmative Covenants and Milestones during the Standstill Period would permit the Required Lenders to terminate the Standstill Period and exercise any rights and remedies under the Term Loan Agreements with respect to the Specified Matters or a Standstill Event of Default. The Company’s failure to comply with the Negative Covenants during the Standstill Period would permit the Required Lenders to terminate the Standstill Agreement and constitute an immediate Event of Default under the Term Loan Agreements. The Company’s failure to comply with any Affirmative Covenants and Milestones (subject to the Cure Period), Negative Covenants or other covenants in the Standstill Agreement would also result in a further increase of the interest margins payable with respect to outstanding Term Loans by 0.50% (i.e., 50 basis points), which increased interest would be payable in kind.

Any Specified Litigation Payment made over the objection of the Ad Hoc Group would (i) entitle the Required Lenders to terminate the Standstill Period and (ii) constitute an Event of Default under the Term Loan Agreements if such payment has a Material Adverse Effect (as defined in the Term Loan Agreements). The failure of the Company to comply with the covenant in respect of the Specified Litigation Payment during the Standstill Period would result in an Event of Default under the Loan Agreement. The settlement agreement with respect to the Securities Class Action Litigation (as defined below in Note 12 - "Commitments and Contingencies") provides that the D&O Proceeds Payment (as defined below in Note 12 - "Commitments and Contingencies") will come from D&O insurance proceeds only; accordingly, the D&O Proceeds Payment, if made, would not constitute "Specified Litigation Payments" under the Standstill Agreement.

The failure to enter into a Comprehensive Amendment on or prior to November 15, 2019, would result in payment by the Company of a one-time in-kind fee in an amount equal to 0.625% of the Term Loans outstanding on such date and require the Akorn Loan Parties to pledge for the benefit of the Lenders all unpledged equity interests in foreign subsidiaries. The failure to enter into a Comprehensive Amendment or otherwise address the term loans on or prior to December 13, 2019, constitutes an immediate Event of Default under the Term Loan Agreements.

The Company is actively seeking to refinance or otherwise address the Term Loans or enter into a Comprehensive Amendment to the Term Loan Agreements by December 13, 2019. In the event that the Company is unable to refinance or otherwise address the Term Loans, the Company would seek to enter into a Comprehensive Amendment to the Term Loan Agreements. The Standstill Agreement requires the Company and Lenders to negotiate in good faith to enter into such a Comprehensive Amendment.

During the three and nine month periods ended September 30, 2019, the Company amortized $8.6 million and $15.5 million, respectively of the deferred financing cost related to the Term Loans, resulting in $6.9 million remaining balance of

deferred financing costs at September 30, 2019. As a result of the obligation to enter into a Comprehensive Amendment by December 13, 2019, the Company will amortize this balance using the straight-line method through December 2019.

As of September 30, 2019, the Company's spread was based upon the Ratings Level as documented below. As of September 30, 2019, the Company was a Ratings Level III for the Term Loan Agreements and related Standstill Agreement.



Ratings Level	Index Ratings (Moody’s/S&P)	Adjusted LIBOR (Eurodollar) Spread	Adjusted Base Rate (ABR) Spread
Level I	B1/B+ or higher	5.75%	4.75%
Level II	B2/B	6.25%	5.25%
Level III	B3/B- or lower	7.00%	6.00%

For the three month periods ended September 30, 2019 and 2018, the Company recorded interest expense of $20.0 million and $14.6 million, respectively in relation to the Term Loans, while for the nine month periods ended September 30, 2019 and 2018, the Company recorded interest expense of $55.6 million and $40.6 million, respectively in relation to the Term Loans. The increase in interest expense is related to higher interest rates, in part due to the Standstill Agreement, during the three and nine month periods ended September 30, 2019, compared to the same periods in 2018.

JPMorgan Credit Facility

On April 17, 2014, the Akorn Loan Parties entered into a Credit Agreement (the “JPM Credit Agreement”) with JPMorgan, as administrative agent, Bank of America, N.A., as syndication agent, and the lenders party thereto (at closing, JPMorgan, Bank of America, N.A. and Wells Fargo Bank, N. A.) for a $150.0 million revolving credit facility (the “JPM Revolving Facility”).

On April 16, 2019, the Akorn Loan Parties, entered into an Amended and Restated Credit Agreement (the “A&R Credit Agreement”) governing the JPM Revolving Facility with the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent. The A&R Credit Agreement provided for a revolving line of credit of up to $150.0 million on an uncommitted basis, and amended the JPM Credit Agreement in certain other respects, including, among other things:

•extended the maturity date by 90 days to July 16, 2019; and

•decreased the undrawn fee from 0.25% to 0.05%.

The JPM Revolving Facility, as amended by the A&R Credit Agreement, was fully uncommitted and discretionary with each lender under the A&R Credit Agreement permitted to make revolving loans or issue letters of credit in its sole discretion. The A&R Credit Agreement expired on July 16, 2019, with no amounts outstanding as of such date.

Debt Maturities Schedule

Aggregate cumulative maturities of debt obligations as of September 30, 2019 are:



(In thousands)	2021
Maturities of debt (1)	$	845,436

(1) Pursuant to the terms of the Standstill Agreement, the Company must enter into a Comprehensive Amendment to the Term Loan Agreements that is satisfactory in form and substance to the Lenders by December 13, 2019. If the Company does not enter into a Comprehensive Amendment, refinance or otherwise address the outstanding Term Loans by December 13, 2019, an event of default will occur under the Term Loan Agreements.