NOTE 6—DEBT AND REDEEMABLE PREFERRED STOCK

The following table presents the Company’s short-term and long-term debt as of September 30, 2017 and December 31, 2016:


	September 30,		December 31,
(In millions)	2017		2016
Long-term debt due within one year, net:
Senior Secured Notes:
Principal amount outstanding	$	305.0	$	—
Unamortized original issue discount and debt issuance costs		(6.7)		—
Senior Secured Notes, net		298.3		—
Revolving credit facilities:
Principal amount outstanding		86.5		—
Unamortized debt issuance costs		(0.8)		—
Revolving credit facilities, net		85.7		—
Capital leases due within one year		3.7		2.3
Total long-term debt due within one year, net	$	387.7	$	2.3
Long-term debt, net:
Senior Secured Notes:
Principal amount outstanding	$	—	$	305.0
Unamortized original issue discount and debt issuance costs		—		(10.1)
Senior Secured Notes, net		—		294.9
Revolving credit facilities:
Principal amount outstanding		—		57.0
Unamortized debt issuance costs		—		(1.5)
Revolving credit facilities, net		—		55.5
Term Loan		—		1.5
Capital leases		5.0		2.3
Total long-term debt, net		5.0		354.2
Total debt	$	392.7	$	356.5

Senior Secured Notes

In connection with the Real Alloy Acquisition, Real Alloy issued $305.0 million of senior secured 10.0% notes (the “Senior Secured Notes”) in January 2015. The Senior Secured Notes are due January 15, 2019, with interest payable on January 15 and July 15 of each year through the date of maturity. For the three months ended September 30, 2017 and 2016, interest expense associated with the Senior Secured Notes was $8.8 million and $8.7 million, respectively, including $1.2 million and $1.1 million, respectively, of amortization of debt discount and issuance costs. For the nine months ended September 30, 2017 and 2016, interest expense associated with the Senior Secured Notes was $26.3 million and $25.9 million, respectively, including $3.4 million and $3.1 million, respectively, of amortization of debt discount and issuance costs. As of September 30, 2017, Real Alloy was in compliance with all applicable covenants under the Indenture of the Senior Secured Notes. However, without additional actions being implemented by management, as outlined in Note 16-Going Concern, a violation of certain of the debt covenants under the Senior Secured Notes is probable to occur in the next twelve months. As such, Real Alloy concluded that facts and circumstances would indicate the Senior Secured Notes warrant short-term classification as of September 30, 2017.

Revolving credit facilities

On March 14, 2017, Real Alloy entered into a Revolving Credit Agreement with Bank of America, N.A. (“Bank of America”) for a $110.0 million senior secured revolving asset-based credit facility (the “ABL Facility”). A portion of the proceeds of the ABL Facility were used to repay and terminate the previously outstanding Asset-Based Facility with Wells Fargo.

The ABL Facility expires on the earlier of the instrument’s expiration date, March 14, 2022, or 90 days prior to the maturity date of the Senior Secured Notes or the Company’s Redeemable Preferred Stock, which as of the date that these unaudited financial statements were filed, was October 17, 2018.

The ABL Facility contains customary affirmative, negative and financial covenants including limitations on the borrower and its subsidiaries with respect to liens, investments, distributions, mergers and acquisitions, disposition of assets, transactions with affiliates and a fixed charge coverage ratio and total leverage ratio.

U.S. dollar denominated revolving loans bear interest, at the Borrowers’ option, either at a LIBOR interest period rate, or the greater of (a) the prime rate announced by Bank of America from time to time, (b) the U.S. Federal Funds Rate plus 0.50%, and (c) the 30-day interest period LIBOR. Canadian dollar denominated loans bear interest, at the Borrowers’ option, either at the CDOR rate for a term comparable to the loan, or floating at the greater of (x) the prime rate announced by Bank of America (Canada) from time to time or (y) the 1-month CDOR plus 1.0%, plus, in each case, a margin based on the amount of the excess availability under the ABL Facility.

In the three months ended September 30, 2017 and 2016, interest expense under the revolving credit facilities was $0.6 million and $0.5 million, respectively, including $0.2 million and $0.2 million, respectively, of scheduled amortization of debt issuance costs. In the nine months ended September 30, 2017 and 2016, interest expense under the revolving credit facilities was $3.3 million and $1.6 million, respectively, including the write-off of $1.4 million of unamortized debt issuance costs associated with the Asset-Based Facility in the first quarter of 2017 and $0.6 million and $0.7 million of scheduled amortization of debt issuance costs in the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, Real Alloy was in compliance with the debt covenants of the ABL Facility. However, without additional actions being implemented by management, as outlined in Note 16 – Going Concern, a violation of certain of the debt covenants under the ABL Facility is probable to occur in the next twelve months. As such, Real Alloy concluded that facts and circumstances would indicate the ABL Facility warrants short-term classification as of September 30, 2017.

Capital leases

In the normal course of operations, Real Alloy enters into capital leases to finance office, mobile and other equipment for its operations. As of September 30, 2017, $3.7 million of the $8.7 million in capital lease obligations are due within the next twelve months.

Redeemable Preferred Stock

The Redeemable Preferred Stock was issued to Aleris on February 27, 2015 as a portion of the purchase price for the Real Alloy Acquisition and has a liquidation preference of $28.5 million as of September 30, 2017. The Redeemable Preferred Stock accrued quarterly dividends at a rate of 7% of the liquidation preference for the first eighteen months after the date of issuance, after which, quarterly dividends accrued at a rate of 8% of the liquidation preference through August 27, 2017, and 9% of the liquidation preference thereafter. As of September 30, 2017, dividends are accrued and paid at 9%. Dividends were paid in-kind for the first two years, and thereafter are accrued and payable in cash. As of September 30, 2017, there are $1.2 million of accrued dividends. Unpaid dividends accumulate interest at a rate of 8% through August 27, 2017, and 9% thereafter. All accrued and accumulated dividends on the Redeemable Preferred Stock will be prior and in preference to any dividend on any of the Company’s common stock or other junior securities.

The Company may generally redeem the shares of Redeemable Preferred Stock at any time at the liquidation preference, and the holders may require the Company to redeem their shares of Redeemable Preferred Stock at the liquidation preference upon a change of control as defined in the Indenture of the Senior Secured Notes (or any debt facility that replaces or redeems the Senior Secured Notes) to the extent that the change of control does not provide for such redemption at the liquidation preference or does not cause a default or prompt an obligation to repurchase or offer to repurchase the Senior Secured Notes under the Indenture. A holder of Redeemable Preferred Stock may require the Company to redeem all, but not less than all, of such holder’s Redeemable Preferred Stock sixty-six months after the issuance date. In addition, the Company will redeem shares of Redeemable Preferred Stock to the extent Aleris is required to indemnify the Company under the Real Alloy Purchase Agreement for the Real Alloy Acquisition. The Redeemable Preferred Stock is not transferrable (other than to another subsidiary of Aleris) for eighteen months following issuance or for such longer period in connection with any ongoing indemnity claims under the Real Alloy Purchase Agreement.

The carrying value of Redeemable Preferred Stock is based on the estimated fair value of the instrument as of the issuance date plus dividends paid in-kind and accretion of the fair value adjustment to the Redeemable Preferred Stock. The difference between the liquidation preference and the estimated fair value as of the issuance date is accreted over the period preceding the holder’s right to redeem the instrument, or sixty-six months from the issue date.

The following table presents activity related to the carrying value of Redeemable Preferred Stock during the nine months ended September 30, 2017:


(In millions)
Balance, December 31, 2016	$	24.9
Accretion of fair value adjustment to Redeemable Preferred Stock		0.7
Balance, September 30, 2017	$	25.6