Hanger refis term debt, gets hedge on debt, lowers interest expenses

By Devika Patel

Knoxville, Tenn., May 15 – Hanger, Inc. cuts its interest expense for 2018 to an expected $40 million after refinancing the alternative debt that led to a high interest expense of $58 million in 2017.

After the company filed its overdue financials, the refinancing of the term debt was carried out in March 2018 and included a hedge agreement on some of that debt.

“We found it necessary to refinance the company during the third quarter of 2016 using alternative sources of debt financing,” executive vice president and chief financial officer Thomas E. Kiraly said on the company’s year ended Dec. 31 and first quarter ended March 31 earnings conference call on Tuesday.

“This refinancing brought the average rate of interest on our indebtedness to approximately 10% and set the stage for interest expenses in 2017 to increase to $58 million as compared to the $45 million we expensed in 2016,” Kiraly said.

The high interest expenses led to a refinancing of the debt in March.

“Promptly upon the filing of our 2016 financial statements in January of 2018, we undertook the full refinancing of the company’s term indebtedness and completed that refinancing in early March,” Kiraly said.

“The refinancing was comprised of a new seven-year $505 million term loan and $100 million five-year revolving credit facility,” Kiraly said.

The company also negotiated a hedge agreement to keep the interest rates fixed on $325 million of the term loan debt.

“Given the rising interest rate environment, we simultaneously entered into a six-year interest rate hedge agreement which has the effect of fixing the interest rates on $325 million, or 64%, of the term loan,” Kiraly said.

“The average rate of interest that we now bear is approximately 6% and we accordingly estimate that the company will report interest expense of approximately $40 million in 2018, which reflects a significant reduction from the $58 million we incurred last year,” Kiraly said.

Management is pleased with the company’s “strong” financial position.

“Hanger is moving forward on a solid and much-improved footing in 2018,” president and chief executive officer Vinit K. Asar said on the call.

“Our financial position is strong.

“We refinanced our debt with a new senior credit facility in early March.

“We also had a good 2017 with respect to cash flow generation,” Asar said.

As of Dec. 31, 2017, the company had $87.9 million of liquidity, comprised of $1.5 million in cash and cash equivalents and $86.4 million in available borrowing capacity under its revolving credit facility, compared to $102.1 million of liquidity as of Dec. 31, 2016.

Details of new debt

On March 6, Hanger closed a new $605 million senior secured credit facility that consists of a $100 million five-year revolver and a $505 million seven-year term loan B.

The term loan B and revolver bear interest at Libor plus 350 basis points. The margin will increase by 25 bps if Hanger’s audited financial statements for the fiscal year ending Dec. 31 are not delivered by a target date.

In connection with the credit facility, Hanger entered into a six-year interest rate swap agreement to effectively fix the interest rate on an initial balance of about $325 million of its floating-rate debt under the new term loan B. The notional amount of the interest rate swap will ratably decrease to about $263 million over the term of the six-year agreement.

Bank of America Merrill Lynch, Wells Fargo Securities LLC and SunTrust Robinson Humphrey Inc. acted as the joint lead arrangers on the deal. Bank of America, NA acted as agent; Wells Fargo Bank, NA and SunTrust Bank as syndication agents and Regions Bank as documentation agent.

There is a fee for unused revolving commitments of 50 bps if the company’s consolidated first-lien net leverage ratio is greater than 4.5 times, or 37.5 bps otherwise.

The company may increase the revolver or add incremental term loans up to the sum of $125 million and an amount such at that the consolidated first-lien net leverage ratio is equal to or less than 3.8 times.

Proceeds from the term loan B were used to repay all principal outstanding under both the company's prior senior credit agreement, totaling $152 million, and its $280 million unsecured term loan B credit agreement, as well as to pay the call premium on the unsecured term loan B and for general corporate purposes.

Based in Austin, Texas, Hanger owns and operates orthotic and prosthetic clinics and distributes orthotic and prosthetic products.

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