12th Ammendment to Credit Agreement

Well we have been waiting for this news and the stock has been displaying amazing resilience by staying above USD 1 and now we have the news.

A final 12th Credit Agreement which will last till the end of the credit agreement period ie. Dec 2,2009.

The following are some of the salient points.

1. The agreement is in place till Dec 2,2009 (no more quaterly updates)
2. The lenders are not going to extend any new letters of credit to SRZ till Dec 2,2009
3. The lenders are not going to extend any additional loans to SRZ through this facility till Dec 2,2009
4. The lenders will renew existing letters of credit that expire for upto 12 months.
5. SRZ has to maintain a cash balance of 5 million at the end of each month.
6. SRZ has to report on 15th of each month, certifying the cash balance as of the last day of the preceeding month.
7. SRZ has to report on 15th of each month a detailed occupancy level report for the preceeding month.
8. SRZ has to report on 15th of every month a 13 week cash flow projection for the company and its subsidiaries.
9. SRZ by June 1,2009 has to report cash flow projections and analysis of projected liquidity for the company and its subsidiary till the maturity date (ie Dec 2,2009)

Note: Points 6,7 & 8 has been followed by SRZ for the past 2 quarters so its not anything new. Point 9 means that by June 1,2009 we as investors should also get a comprehensive analysis of how much cash flow will be there till the end of the year.
(actually its already predicted to be around 35 million in this filing)10. The following tests for financial viability have been omitted from the credit agreement: Consolidated Networth, Leverage Ratio, Fixed Charge Coverage Ratio, Required liquidity.
11. Only Test is unrestricted Cash balance of not less than 5 million each month and Company and its subsidiaries will maintain most of their unrestricted cash with Bank of America (Administrative Agents)
12. Letters of Credit will attract an interest of 4.25% and will be paid by SRZ on a quarterly basis.
13. Minimum rate of interest on loans (Euro or USD dollar denominated)is 5.75%
14. Euro loans: LIBOR + 5.25%
15. US Dollar loans: Bank rate + 3.75%
16. SRZ subsidaires are also included as part of the assets of the obligors(SRZ) and their cash balances to be included in the 5 million cash balance test.
17. SRZ can issue 5 million of subordinate debt.
18. SRZ can make additional investments with regards to projects when in build stage which are then paid back to srz when the projects get completed.(certificate of occupancy)
19. there is a contemplated sale transaction of 17 million in near future.
20. By 30th May 2009 SRZ subsidiaries will join as Loan parties to this agreement and SRZ can at the max have an extension of 15 more days to have the documentation done for their subsidiaries.

My take: The new management team is providing a lot of good positive feedback to the lenders and the lenders have agreed to reduce the financial test and are willing to accept a much more simple. Cash in the bank kind of test.

SRZ management will continue to keep the lenders in confidence and will share their cash flow projections making the situation more manageable. The original cash in the bank policy was 50 million(with all the financial tests) now its 5 million (with no financial test!!) just additional cash projection sharing.. So a great big Thumbs up to the new management team.

There is additional 17 million asset sale which has been disclosed already.

SRZ will be sharing their plans with regards to Cash flows with the lenders by June 1,2009. (I dont think these projections will be made public as the company no longer needs to disclose all this as the agreement is stable till Dec 2,2009 and had been mentioned specifically in previous SEC filings.)

There is a mention that anything more than 35 million of unrestricted cash flow by end of the year will be used to payback the lenders so we can expect net cash balances to be atleast 35 million by end of year (Dec 2008 quarter number is 29.5 million)

All said and done the tight restrictions leave no chance for the management to wiggle and hence the rights of the shareholders and the bond holders will be protected and enhanced.

A strong buy considering the fact that SRZ has a market cap of 94 million and BKD is about 1 billion while their sales figures are comparable (before the sale of Greystone). SRZ is no longer in default with its loan covenants.

PN: These are my views and interpretation of the 12 Credit Agreement. The actual 12 Agreement document can be obtained out here