NOTE 10—DEBT AND REDEEMABLE PREFERRED STOCK

RA DIP Financing Facility

The following table presents the portion of the RA DIP Financing Facility that is not subject to compromise as of December 31, 2017. The amounts associated with the RA DIP Financing Facility that are subject to compromise as of December 31, 2017 are described in Note 24—Debtor-in-Possession Financial Information.


	December 31,
(In millions)	2017		2016
RA DIP Financing:
RA DIP ABL Facility:
Principal amount outstanding	$	67.9	$	—
Unamortized debt issuance costs		(1.2)		—
RA DIP ABL Facility, net		66.7		—
New Money DIP Term Notes:
Principal amount outstanding		40.0		—
Unamortized debt issuance costs		(2.8)		—
New Money DIP Term Notes, net		37.2		—
RA DIP Financing, net	$	103.9	$	—

On the Petition Date, the Real Alloy Debtors secured a commitment for debtor-in-possession financing (the “RA DIP Financing Facility”), which was approved on an interim basis by the Bankruptcy Court on November 20, 2017, and on a final basis on January 17, 2018. On January 19, 2018, the Real Alloy Debtors closed the transactions under which the RA DIP Financing Facility has been provided. The RA DIP Financing Facility is comprised of (i) up to $85 million in New Money DIP Term Notes, (ii) the Roll Up DIP Term Notes in exchange for $170 million of the Senior Secured Notes (as defined below), and (iii) up to $110 million in borrowing under the RA DIP ABL Facility, together with the New Money DIP Term Notes, the “RA DIP Financing”.

The purchasers of the New Money DIP Term Notes were entitled to exchange, on a pro rata basis, up to $170 million of their existing Senior Secured Notes for Roll Up DIP Term Notes. As such, the balance of the Roll Up DIP Term Notes has been classified in liabilities subject to compromise as of December 31, 2017. See Note 24—Debtor-in-Possession Financial Information for more information and liabilities subject to compromise.

Certain U.S. subsidiaries of Real Alloy will guarantee the obligations of Real Alloy under the DIP Financing Facility. Subject to certain exceptions, the RA DIP Note Facility will be secured by a first-priority senior-secured lien on substantially all of the assets of the Real Alloy Debtors other than the ABL Priority Collateral and a second-priority senior-secured lien on the ABL Priority Collateral. The security interests and liens granted in favor of the Purchasers are subject only to certain carve-outs and permitted liens, as set forth in the Note Purchase Agreement and the final order of the Bankruptcy Court related thereto. The RA DIP Financing Facility is subject to certain covenants, including, without limitation, covenants related to the incurrence of additional debt, granting of liens, the making of restricted payments, compliance with the approved budget (subject to certain permitted variances) and certain bankruptcy-related covenants described below. The RA DIP Financing Facility is also subject to certain mandatory prepayment events, including, without limitation, upon the sale of certain assets, and certain events of default, including, without limitation, payment defaults, cross-defaults to other indebtedness and certain bankruptcy-related defaults.

The RA DIP Financing Facility also includes covenants requiring compliance by the Real Alloy Debtors with “Sale/Chapter 11 Milestones”, including: (i) submission of a motion to the Bankruptcy Court to approve the sale of substantially all of the assets of the Real Alloy Debtors pursuant to Section 363 of the Bankruptcy Code and procedures for such sale; (ii) within 14 days following the Petition Date, retention of a chief restructuring officer by the Real Alloy Debtors; (iii) within 35 days following the Petition Date, an order of the Bankruptcy Court approving the Sales Procedures (the “Bid Procedures Order”), including allowing the Purchasers and the holders of the Senior Secured Notes to credit bid in the sale process for up to the full amount of their claims; (iv) within 75 days following the Petition Date (extendable by up to 25 days by the Purchasers provided that no Event of Default has occurred or has been waived by the Purchasers), the selection and Bankruptcy Court approval of a stalking horse bid, which will include full cash payment of amounts outstanding under the RA DIP ABL Facility and the Prior ABL Facility, if any (collectively, the “Aggregate ABL Obligations”); (v) within 130 days following the Petition Date, conduct of a sale auction by the Real Alloy Debtors for substantially all of their assets, in accordance with the Bid Procedures Order (the “Auction”); (vi) within one day of the conclusion of the Auction, selection of a successful bidder and a back-up bidder; (vii) within five days of the conclusion of the Auction, Bankruptcy Court approval of the sale and entry of an order authorizing and approving the sale and related transactions; and (viii) within 160 days after the Petition Date, the closing of the sale and full cash payment of the Aggregate ABL Obligations. The Bankruptcy Court approved the sale of the Real Alloy Debtors’ assets on March 29, 2018.

RA DIP Term Notes Facility

The Note Purchase Agreement was entered into on November 21, 2017, with amendment and restatement on January 19, 2018, setting forth the terms and conditions pursuant to which the lenders would provide a first-lien senior-secured super-priority financing in the principal amount of up to $255 million, including the $170 million Roll Up DIP Term Notes and up to $85 million in New Money DIP Term Notes, of which up to $65 million of the proceeds are for the exclusive use of the Real Alloy Debtors and up to $20 million are exclusively available to the Real Alloy’s foreign subsidiaries. The Notes Purchase Agreement is secured by a first lien on substantially all of the assets of the Real Alloy Debtors, excluding the ABL Priority Collateral, and secured by a second-priority lien on the ABL Priority Collateral.

The RA DIP Note Financing will mature on the date that is the earliest to occur of (a) May 18, 2018; (b) the consummation of any sale of all or substantially all of the Real Alloy Debtors’ assets in accordance with Section 363 of the Bankruptcy Code; or (c) an event of default under the Notes Purchase Agreement.

The Roll Up DIP Term Notes will be affected by the Section 363 Sale, which was approved by the Bankruptcy Court on March 29, 2018. As such, the outstanding balance of $170 million has been classified in liabilities subject to compromise as of December 31, 2017. See Note 24—Debtor-in-Possession Financial Information for more information about liabilities subject to compromise.

Fees paid on the RA DIP Term Notes Facility include a closing fee of 1.5% of the aggregate facility size due to all Purchasers, and a backstop fee of 3.5% of the commitment amounts payable to the Purchasers who executed the Note Purchase Agreement on November 21, 2017, plus customary agent fees, which have been capitalized and will be recognized in interest income over the term of the RA DIP Term Notes Facility.

The RA DIP Note Facility matures on the earlier of (a) May 18, 2018; (b) the consummation of any sale of all or substantially all of the Real Alloy Debtors’ assets in accordance with the Section 363 Sale; or (c) an event of default, under the Notes Purchase Agreement.

Interest on the RA DIP Note Facility accrues i) on the New Money DIP Term Notes at a rate of 11.50% per annum plus an additional 2.00% per annum during the continuance of an event of default, payable monthly and ii) on the Roll Up DIP Term Notes at a rate of 10.00% per annum, payable upon maturity or default. Repayment and prepayment of any principal of the RA DIP Note Facility can be made without a premium or penalty.

RA DIP ABL Facility

The RA DIP ABL Credit Agreement was entered into on November 20, 2017, by and among certain Real Alloy Debtors, the Real Alloy guarantors under a $110 million senior-secured revolving asset-based credit facility (the “Prior ABL Facility”), Bank of America, N.A. and certain other lenders (the “RA DIP ABL Lenders”) and sets forth the terms and conditions pursuant to which the RA DIP ABL Lenders agreed to provide up to $110 million of senior-secured super-priority debtor-in-possession financing. The RA DIP ABL Facility includes a letter of credit sub-facility for up to $20 million.

Borrowings under the RA DIP ABL Facility are available upon the satisfaction of customary conditions precedent and subject to availability under the borrowing base (as defined in the RA DIP ABL Credit Agreement) in effect from time to time. The availability under the RA DIP ABL Facility was initially reduced by the outstanding principal amount of the Prior ABL Facility. Subject to certain exceptions, all cash held by the Real Alloy Debtors and all proceeds of their assets subject to a lien in favor of the lenders of the Prior ABL Facility were used to repay the Prior ABL Facility.

The RA DIP ABL Facility matures on the earlier of May 20, 2018; the consummation of any sale of all or substantially all of the ABL Priority Collateral pursuant to Section 363 of the Bankruptcy Code; or the effective date of any Chapter 11 plan of any Real Alloy Debtor, unless otherwise agreed by the DIP ABL Lenders.

Interest on the outstanding principal amount of loans under the RA DIP ABL Facility is payable at an annual rate based on, at the option of the Real Alloy Debtors, either (a) the Base Rate plus 2.25%, or (b) LIBOR plus 3.25% and is generally paid on a monthly basis. As of December 31, 2017, the interest rate under the RA DIP ABL Facility was 5.1%. Upon an event of default, the interest rate in effect at the time will be increased by 2.0%. The Real Alloy Debtors will pay an unused line fee of 0.25% and a closing fee of $1.1 million. Interest expense under the RA DIP ABL Facility was $0.5 million, including $0.3 million related to the amortization of debt issuance costs in the year ended December 31, 2017.

As of December 31, 2017, Real Alloy was in compliance with all applicable covenants under the RA DIP Financing Facility. Real Alloy received a waiver to the covenant in the RA DIP Financing Facility that required Real Alloy to supply certain year end audited financial information by March 31, 2018.

Long-term debt

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


	December 31,
(In millions)	2017		2016
Long-term debt due within one year:
Capital leases	$	3.6	$	2.0
Term loan		—		0.3
Long-term debt due within one year		3.6		2.3
Long-term debt:
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
Capital leases		4.4		2.6
Term loan		—		1.2
Long-term debt		4.4		354.2
Total long-term debt	$	8.0	$	356.5

Senior Secured Notes

On January 8, 2015, Real Alloy, completed a private placement of $305 million aggregate principal of 10% senior secured notes (the “Senior Secured Notes”). Prior to the Petition Date, the Senior Secured Notes were scheduled to mature on January 15, 2019 and interest was payable on January 15 and July 15 of each year, commencing on July 15, 2015, through the date of maturity. For the years ended December 31, 2017, 2016 and 2015, interest expense associated with the Senior Secured Notes was $34.6 million, $34.7 million and $33.4 million, respectively, including $4.1 million, $4.2 million and $3.6 million, respectively, of noncash expense related to the amortization of the original issue discount and debt issuance costs.

The filing of the Chapter 11 Cases is an event of default under the Senior Secured Notes pursuant to their Indenture. The occurrence of an event of default in connection with a voluntary bankruptcy proceeding under the Senior Secured Notes automatically triggers the unpaid principal and accrued but unpaid interest on all the Senior Secured Notes to be due and payable, and Wilmington Trust, as trustee and notes collateral trustee, may seek bankruptcy court authority to exercise all rights and remedies available to it under the Indenture, including by enforcing any rights to the collateral provided under the Indenture or related agreements. As noted above, $170 million of the Senior Secured Notes were exchanged for $170 million of Roll Up DIP Term Notes. The remaining $135 million in Senior Secured Notes and the $170 million of Roll Up DIP Term Notes will be affected by the Section 363 Sale, which was approved by the Bankruptcy Court on March 29, 2018. As such, these balances and the related accrued prepetition interest of $10.2 million have been classified as liabilities subject to compromise as of December 31, 2017. Postpetition interest on the Senior Secured Notes, through December 31, 2017, was $3.8 million, accrued at the Default Rate (as defined in the Indenture) and included in liabilities subject to compromise. Upon filing the Chapter 11 Cases the remaining unamortized original issue discount and debt issuance costs on the Senior Secured Notes, totaling $6.0 million, was included in reorganization items, net in the consolidated statements of operations. See Note 24—Debtor-in-Possession Financial Information for additional information about reorganization items.

Revolving Credit Facilities

On March 14, 2017, Real Alloy entered into an asset-based lending facility with Bank of America, N.A. for a $110 million senior-secured revolving asset-based credit facility (the “Prior ABL Facility”). The initial draws on the Prior ABL Facility were used to repay and terminate Real Alloy’s previously outstanding asset-based facility with Wells Fargo (the “Asset-Based Facility” and together with the Prior ABL Facility, the “Revolving Credit Facilities”).

The filing of the Chapter 11 Cases was an event of default under the Prior ABL Facility. The occurrence of an event of default in connection with a voluntary bankruptcy proceeding under the Prior ABL Facility automatically triggers the unpaid principal amount of all outstanding loans and all interest accrued and unpaid thereon to become immediately due and payable, and the lender may seek Bankruptcy Court authority to exercise all rights and remedies available to it under the agreement, including by enforcing any rights to the collateral provided under the agreement. Following the Petition Date, all cash held by the Real Alloy Debtors and all proceeds of their assets subject to a lien in favor of the lenders under the Prior ABL Facility were used to repay the Prior ABL Facility. No amounts were outstanding under the Prior ABL Facility as of December 31, 2017.

For the years ended December 31, 2017, 2016 and 2015, interest expense associated with the Revolving Credit Facilities was $4.7 million, $2.2 million and $0.7 million, respectively, including $2.3 million, $0.9 million and $0.7 million, respectively, related to the amortization of debt issuance costs.

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 December 31, 2017 and 2016, $3.6 million and $2.0 million, respectively, of the $8.0 million and $4.6 million in total capital lease obligations, respectively, were due within the next twelve months.

Contractual maturities of long-term debt

The following table presents contractual maturities of long-term debt as of December 31, 2017:


(In millions)
2018	$	3.6
2019		3.1
2020		1.0
2021		0.2
2022		0.1
Total	$	8.0

Redeemable Preferred Stock

On February 27, 2015, as a portion of the purchase price for the Real Alloy acquisition, $25.0 million of Redeemable Preferred Stock was issued to Aleris Corporation (“Aleris”). The Redeemable Preferred Stock paid quarterly dividends at a rate of 7% for the first eighteen months after the date of issuance, 8% for the following twelve months, and 9% thereafter. Dividends were paid in-kind for the first two years, and thereafter were to be paid in cash or accrued beginning in 2017. As of December 31, 2017, the dividend rate was 9%. All accrued and accumulated dividends on the Redeemable Preferred Stock are 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 under 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. 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 may 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 held by Aleris and its subsidiaries has a liquidation preference of $28.5 million as of December 31, 2017, and is not transferrable (other than to another subsidiary of Aleris) for eighteen months following issuance (or such longer period in connection with any ongoing indemnity claims under the Real Alloy Purchase Agreement). The maximum redemption amount if redeemed by the holder on August 27, 2020, their earliest redemption date, is $28.5 million, plus any accrued but unpaid dividends.

Prior to the Petition Date, the carrying value of Redeemable Preferred Stock was based on the estimated fair value of the instrument at issuance, calculated using a discounted cash flow analysis using the Hull & White model, with an original term of sixty-six months, assuming either the holder will put or the issuer will call at the redemption date. The cash dividend yield and the Redeemable Preferred Stock, including the payment-in-kind Redeemable Preferred Stock, were discounted at the spot rate plus a 17.5% credit spread adjustment to a zero coupon yield curve, which was being accreted to the redemption value over the period preceding the holder’s right to mandatorily redeem the instrument, or sixty-six months from issuance, using the effective interest method. As a result of the bankruptcy, the Redeemable Preferred Stock is carried at its liquidation preference as of December 31, 2017.

If the RI Plan, as proposed and amended, is confirmed by the Bankruptcy Court, Real Industry’s existing common stockholders will receive their pro rata share of 20% of the newly issued equity in Reorganized RELY, assuming the Company’s stockholders vote to accept the RI Plan as a class. Similarly, the holder of the Redeemable Preferred Stock, who has agreed to vote in favor of the RI Plan, will receive a $2.0 million cash payment plus 31% of the newly issued equity in Reorganized RELY, in exchange for full settlement of its $28.5 million liquidation preference and $1.8 million of accrued dividends. If the stockholders do not vote to approve the RI Plan as a class, then, upon confirmation of the RI Plan by the Bankruptcy Court, the existing common stockholders will receive 16% of the newly issued equity in Reorganized RELY, with 35% being issued to the holder of the Redeemable Preferred Stock, plus the aforementioned $2.0 million cash payment.

The following table presents the activity related to the carrying value of Redeemable Preferred Stock during the years ended December 31, 2017 and 2016:


(In millions)
Balance, December 31, 2015	$	21.9
Dividends on Redeemable Preferred Stock, in-kind		2.0
Accretion of fair value adjustment to Redeemable Preferred Stock		1.0
Balance, December 31, 2016		24.9
Accretion of fair value adjustment to Redeemable Preferred Stock		3.6
Balance, December 31, 2017	$	28.5