Annual report pursuant to Section 13 and 15(d)

Debt

v3.22.1
Debt
12 Months Ended
Dec. 31, 2021
Debt Disclosure [Abstract]  
Debt Debt
The components of debt were as follows:
December 31,
2021 2020
(in thousands)
First Lien Term Loan Facility $ 707,863  $ 816,213 
Second Lien Term Loan Facility —  215,000 
Revolving Credit Facility —  10,000 
Total debt 707,863  1,041,213 
Less: Original issue discount (1,993) (4,499)
Less: Unamortized debt issuance costs (8,837) (14,967)
Less: Current portion of long-term debt (8,350) (8,350)
Long-term debt, less current portion $ 688,683  $ 1,013,397 
On July 12, 2018, the Company entered into the following credit arrangements:
a first lien senior secured term loan facility, in an aggregate principal amount of $835.0 million,     maturing on July 12, 2025 (the “First Lien Term Loan Facility”);
a first lien senior secured revolving credit facility, in an aggregate principal amount of up to $100.0 million, including a $40.0 million letter of credit sub-facility, maturing on July 12, 2023 (the “Revolving Credit Facility” and, together with the First Lien Term Loan Facility, the “First Lien Facilities”); and
a second lien senior secured term loan facility, in an aggregate principal amount of $215.0 million, maturing on July 12, 2026 (the “Second Lien Term Loan Facility” and, together with the First Lien Facilities, the “Senior Facilities”).
First Lien Facilities
The Company is required to make scheduled quarterly payments equal to 0.25% of the aggregate initial outstanding principal amount of the First Lien Term Loan Facility, or approximately $2.1 million per quarter, with the remaining balance payable at maturity.
The Company may make voluntary prepayments on the First Lien Term Loan Facility at any time prior to maturity at par. On November 30, 2021 the Company used $100.0 million of proceeds of the IPO to repay, in part, the First Lien Term Loan Facility. In conjunction with the repayment, the Company recorded a $1.6 million loss on debt extinguishment to write off unamortized deferred financing fees and unamortized original issue discounts. This loss is recorded in interest expense in the consolidated statements of operations.
The Company is required to make prepayments on the First Lien Term Loan Facility with the net cash proceeds of certain asset sales, debt incurrences, casualty events and sale-leaseback transactions, subject to certain specified limitations, thresholds and reinvestment rights. Additionally, the Company is required to make annual prepayments on the outstanding First Lien Term Loan Facility with a percentage (subject to leverage-based reductions) of the Company’s excess cash flow, as defined therein, if the excess cash flow exceeds a certain specified threshold. For the years ended December 31, 2021, 2020, and 2019, the Company was not required to make an annual prepayment under the First Lien Term Loan Facility based on the Company’s excess cash flow.
The First Lien Term Loan Facility has an interest rate calculated as, at the Company’s option, either (a) LIBOR determined by reference to the costs of funds for Eurodollar deposits for the interest period relevant to such borrowing, adjusted for certain additional costs (“LIBOR Reference Rate”) with a floor of 0.00% or (b) a base rate determined by reference to the highest of (i) the federal funds effective rate plus 0.50% per annum, (ii) the rate the Administrative Agent announces from time to time as its prime lending rate in New York City, and (iii) one-month adjusted LIBOR plus 1.00% per annum (“ABR”), in each case, plus the applicable margin of 3.75% for LIBOR loans and 2.75% for ABR loans, and is payable on each interest payment date, at least quarterly, in arrears. The applicable margin for borrowings under the Revolving Credit Facility is 3.00% for LIBOR loans and 2.00% for ABR loans, in each case, subject to adjustment pursuant to a leverage-based pricing grid. As of December 31, 2021, the First Lien Term Loan Facility accrued interest at one-month LIBOR plus 3.75%, and the Revolving Credit Facility accrued interest at one-month LIBOR plus 3.00%.
The Company’s obligations under the First Lien Facilities are guaranteed, jointly and severally, on a senior secured first-priority basis, by substantially all of the Company’s domestic wholly-owned material subsidiaries, as defined in the agreement, and are secured by first-priority security interests in substantially all of the assets of the Company and its domestic wholly-owned material subsidiaries, subject to certain permitted liens and exceptions.
As of December 31, 2021, the Company had approximately $98.2 million available borrowing under the Revolving Credit Facility, after utilizing approximately $1.8 million for letters of credit. The Company is required to pay a quarterly fee of 0.50% on unutilized commitments under the Revolving Credit Facility, subject to adjustment pursuant to a leverage-based pricing grid. As of December 31, 2021, the quarterly fee on unutilized commitments under the Revolving Credit Facility was 0.50%.
Second Lien Term Loan Facility
On November 3, 2021, the Company used proceeds from the IPO to repay, in full, $215.0 million of principal outstanding on the Second Lien Term Loan Facility. In conjunction with the repayment, the Company recorded a $3.4 million loss on extinguishment of debt to write off unamortized deferred financing fees and unamortized original issue discounts. This loss is recorded in interest expense in the consolidated statements of operations.
The Company was required to make prepayments on the Second Lien Term Loan Facility with the net cash proceeds of certain asset sales, debt incurrences, casualty events and sale-leaseback transactions, subject to certain specified limitations, thresholds and reinvestment rights, in each case to the extent permitted under the First Lien Facilities prior to the repayment in full and discharge thereof. Additionally, the Company was required to make annual prepayments on the outstanding Second Lien Term Loan Facility with a percentage (subject to leverage-based reductions) of the Company’s excess cash flow, as defined therein, if the excess cash flow exceeded a certain specified threshold, to the extent permitted under the First Lien Facilities prior to the repayment in full and discharge thereof. For the years ended December 31, 2021, 2020, and 2019, the Company was not required to make an annual prepayment under the Second Lien Term Loan Facility based on the Company’s excess cash flow.
The Second Lien Term Loan Facility had an interest rate calculated as, at the Company’s option, either (a) LIBOR with a floor of 0.00% or (b) ABR, in each case, plus the applicable margin of 7.25% for LIBOR loans and 6.25% for ABR loans, and was payable on each interest payment date, at least quarterly, in arrears. As of December 31, 2020, the Second Lien Term Loan Facility accrued interest at one-month LIBOR plus 7.25%.
The Company’s obligations under the Second Lien Term Loan Facility were guaranteed, jointly and severally, on a senior secured second-priority basis, by substantially all of the Company’s domestic wholly-owned material subsidiaries and were secured by second-priority security interests in substantially all of the assets of the Company and its domestic wholly-owned material subsidiaries, subject to certain permitted liens and exceptions.
LIBOR
Given that one, three, six and twelve month USD LIBOR are available until the end of June 2023, the Company is evaluating the appropriate time to engage with the agent and lenders under the First Lien Term Loan Facility and Revolving Credit Facility with respect to modernizing the LIBOR provisions prior to June 2023. If the Company does not enter into amendments to its credit facilities to modernize the LIBOR provisions prior to the end of 2022, then two-month USD and non-USD LIBOR settings will be suspended until an amendment is effective.
HireRight is party to three interest rate swaps, all of which terminate on December 31, 2023, and reference three-month LIBOR. ICE Benchmark Administration has announced that three-month LIBOR will continue to be available until the end of June 2023, rather than the end of December 2021. The International Swaps and Derivatives Association (“ISDA”) has developed the Interbank Lending Rate (“IBOR”) Fallbacks Protocol to address LIBOR cessation and incorporate industry-endorsed fallback rates into legacy transactions, like HireRight’s interest rate swaps. The Company is in the process of evaluating the protocol, including the appropriate time to adhere, or the appropriate time to engage with its swap dealer counterparties with respect to LIBOR cessation prior to June 2023. For further information on the interest rate swaps, please see Note 11 — Derivative Instruments.
Debt Covenants
The First Lien Facilities contain certain covenants and restrictions that limit the Company’s ability to, among other things: (a) incur additional debt or issue certain preferred equity interests; (b) create or permit the existence of certain liens; (c) make certain loans or investments (including acquisitions); (d) pay dividends on or make distributions in respect of the capital stock or make other restricted payments; (e) consolidate, merge, sell, or otherwise dispose of all or substantially all of the Company’s assets; (f) sell assets; (g) enter into certain transactions with affiliates; (h) enter into sale-leaseback transactions; (i) restrict dividends from the Company’s subsidiaries or restrict liens; (j) change the Company’s fiscal year; and (k) modify the terms of certain debt agreements. In addition, the First Lien Facilities also provide for customary events of default. The Company was in compliance with the covenants under the First Lien Facilities through the year ended December 31, 2021.
The Company is also subject to a springing financial maintenance covenant under the Revolving Credit Facility, which requires the Company to not exceed a specified first lien leverage ratio at the end of each fiscal quarter if the outstanding loans and letters of credit under the Revolving Credit Facility, subject to certain exceptions, exceed 35% of the total commitments under the Revolving Credit Facility at the end of such fiscal quarter. The Company was not subject to this covenant as of December 31, 2021 or 2020, as outstanding loans and letters of credit under the Revolving Credit Facility did not exceed 35% of the total commitments under the facility.
Other
Amortization of debt discount and debt issuance costs related to the First Lien Term Loan Facility and the Second Lien Term Loan Facility are included in interest expense and were as follows:
Year Ended December 31,
2021 2020 2019
(in thousands)
Debt discount $ 770  $ 767  $ 652 
Debt issuance costs 2,860  2,819  2,521 
Total debt discount and issuance costs $ 3,630  $ 3,586  $ 3,173 
In addition, interest expense includes the amortization of debt issuance costs for the Revolving Credit Facility of $0.4 million for each of the years ended December 31, 2021, 2020, and 2019. Unamortized debt issuance costs for the Revolving Credit Facility are recorded in other non-current assets on the Company’s consolidated balance sheets.
The weighted average interest rate on outstanding borrowings during the years ended December 31, 2021, 2020, and 2019 was 4.5%, 5.1%, and 6.8%, respectively.
The maturities of the Company’s outstanding debt were as follows:
Year Ended December 31,
(in thousands)
2022 $ 8,350 
2023 8,350 
2024 8,350 
2025 682,813 
2026 — 
Thereafter — 
$ 707,863 
Fair Value
The fair value of the Company’s First Lien Term Loan Facility and Second Lien Term Loan Facility is calculated based upon market price quotes obtained for the Company’s debt agreements (Level 2 fair value inputs). The fair value of the Revolving Credit Facility approximates carrying value, based upon the short-term duration of the interest rate periods currently available to the Company. The estimated fair values were as follows:
December 31, 2021 December 31, 2020
Carrying Value Fair Value Carrying Value Fair Value
(in thousands)
First Lien Term Loan Facility $ 705,870  $ 704,550  $ 813,361  $ 784,894 
Second Lien Term Loan Facility —  —  213,353  160,014 
Revolving Credit Facility —  —  10,000  10,000 
Total $ 705,870  $ 704,550  $ 1,036,714  $ 954,908