Annual report pursuant to Section 13 and 15(d)

Debt

v2.4.1.9
Debt
12 Months Ended
Dec. 31, 2014
Debt Disclosure [Abstract]  
Debt
Debt    
In January 2013, we entered into note purchase agreements (the “2033 Senior Notes”) with qualified institutional buyers and accredited investors (collectively, the “Purchaser”) in a private placement in reliance on exemptions from registration under the Securities Act of 1933, (the “Securities Act”). The Purchasers of the 2033 Senior Notes include Frost Gamma Investments Trust, a trust affiliated with Dr. Frost, and Hsu Gamma Investment, L.P., an entity affiliated with Dr. Hsiao. The 2033 Senior Notes were issued on January 30, 2013. The 2033 Senior Notes, which total $175.0 million, bear interest at the rate of 3.00% per year, payable semiannually on February 1 and August 1 of each year, beginning August 1, 2013. The 2033 Senior Notes will mature on February 1, 2033, unless earlier repurchased, redeemed or converted. Upon a fundamental change as defined in the instruments governing the 2033 Senior Notes, subject to certain exceptions, the holders may require us to repurchase all or any portion of their 2033 Senior Notes for cash at a repurchase price equal to 100% of the principal amount of the 2033 Senior Notes being repurchased, plus any accrued and unpaid interest to but not including the fundamental change repurchase date.
The following table sets forth information related to the 2033 Senior Notes which is included our Consolidated Balance Sheets as of December 31, 2014:
(In thousands)
Embedded conversion option
 
2033 Senior Notes
 
Discount
 
Total
Balance at December 31, 2013
$
101,087


$
158,064


$
(47,239
)

$
211,912

Amortization of debt discount




5,662


5,662

Change in fair value of embedded derivative
12,213






12,213

Conversion
(47,353
)

(70,422
)

19,442


(98,333
)
Balance at December 31, 2014
$
65,947


$
87,642


$
(22,135
)

$
131,454

The following table sets forth information related to the 2033 Senior Notes which is included our Consolidated Balance Sheets as of December 31, 2013:
(In thousands)
Embedded conversion option
 
2033 Senior Notes
 
Discount
 
Total
Balance at December 31, 2012
$

 
$

 
$

 
$

Issuance of 3.00% convertible notes
59,204

 
175,000

 
(59,204
)
 
175,000

Amortization of debt discount

 

 
6,596

 
6,596

Change in fair value of embedded derivative
52,742

 

 

 
52,742

Conversion
(10,859
)
 
(16,936
)
 
5,369

 
(22,426
)
Balance at December 31, 2013
$
101,087

 
$
158,064

 
$
(47,239
)
 
$
211,912


The 2033 Senior Notes will be convertible at any time on or after November 1, 2032, through the second scheduled trading day immediately preceding the maturity date, at the option of the holders. Additionally, holders may convert their 2033 Senior Notes prior to the close of business on the scheduled trading day immediately preceding November 1, 2032, under the following circumstances: (1) conversion based upon satisfaction of the trading price condition relating to the 2033 Senior Notes; (2) conversion based on the Common Stock price; (3) conversion based upon the occurrence of specified corporate events; or (4) if we call the 2033 Senior Notes for redemption. The 2033 Senior Notes will be convertible into cash, shares of our Common Stock, or a combination of cash and shares of Common Stock, at our election unless we have made an irrevocable election of net share settlement. The initial conversion rate for the 2033 Senior Notes will be 141.48 shares of Common Stock per $1,000 principal amount of 2033 Senior Notes (equivalent to an initial conversion price of approximately $7.07 per share of Common Stock), and will be subject to adjustment upon the occurrence of certain events. In addition, we will, in certain circumstances, increase the conversion rate for holders who convert their 2033 Senior Notes in connection with a make-whole fundamental change (as defined in the Indenture) and holders who convert upon the occurrence of certain specific events prior to February 1, 2017 (other than in connection with a make-whole fundamental change). Holders of the 2033 Senior Notes may require us to repurchase the 2033 Senior Notes for 100% of their principal amount, plus accrued and unpaid interest, on February 1, 2019, February 1, 2023 and February 1, 2028, or following the occurrence of a fundamental change as defined in the indenture governing the 2033 Senior Notes.
We may not redeem the 2033 Senior Notes prior to February 1, 2017. On or after February 1, 2017 and before February 1, 2019, we may redeem for cash any or all of the 2033 Senior Notes but only if the last reported sale price of our Common Stock exceeds 130% of the applicable conversion price for at least 20 trading days during the 30 consecutive trading day period ending on the trading day immediately prior to the date on which we deliver the redemption notice. The redemption price will equal 100% of the principal amount of the 2033 Senior Notes to be redeemed, plus any accrued and unpaid interest to but not including the redemption date. On or after February 1, 2019, we may redeem for cash any or all of the 2033 Senior Notes at a redemption price of 100% of the principal amount of the 2033 Senior Notes to be redeemed, plus any accrued and unpaid interest up to but not including the redemption date.
The terms of the 2033 Senior Notes, include, among others: (i) rights to convert into shares of our Common Stock, including upon a fundamental change; and (ii) a coupon make-whole payment in the event of a conversion by the holders of the 2033 Senior Notes on or after February 1, 2017 but prior to February 1, 2019. We have determined that these specific terms are considered to be embedded derivatives. As a result, embedded derivatives are required to be separated from the host contract, the 2033 Senior Notes, and carried at fair value when: (a) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract; and (b) a separate, stand-alone instrument with the same terms would qualify as a derivative instrument. We have concluded that the embedded derivatives within the 2033 Senior Notes meet these criteria and, as such, must be valued separate and apart from the 2033 Senior Notes and recorded at fair value each reporting period.
For accounting and financial reporting purposes, we combine these embedded derivatives and value them together as one unit of accounting. At each reporting period, we record these embedded derivatives at fair value which is included as a component of the 2033 Senior Notes on our Consolidated Balance Sheets.
On August 30, 2013, one of the conversion rights in the 2033 Senior Notes was triggered. Holders of the 2033 Senior Notes converted $16.9 million principal amount into 2,396,145 shares of our Common Stock at a rate of 141.48 shares of Common Stock per $1,000 principal amount of 2033 Senior Notes. We recorded a $1.0 million non-cash gain related to the conversion. The gain on exchange is included within Other income (expense) on our Consolidated Statement of Operations.
In June 2014, we entered into an exchange agreement with a holder of the Company’s Notes pursuant to which such holder exchanged $70.4 million in aggregate principal amount of Notes for 10,974,431 shares of the Company’s Common Stock and approximately $0.8 million in cash representing accrued interest through the date of completion of the exchange. We recorded a $2.7 million non-cash gain related to the exchange. The gain on exchange is included within Other income (expense) on our Consolidated Statement of Operations.
We used a binomial lattice model in order to estimate the fair value of the embedded derivative in the 2033 Senior Notes. A binomial lattice model generates two probable outcomes — one up and another down —arising at each point in time, starting from the date of valuation until the maturity date. A lattice model was initially used to determine if the 2033 Senior Notes would be converted, called or held at each decision point. Within the lattice model, the following assumptions are made: (i) the 2033 Senior Notes will be converted early if the conversion value is greater than the holding value; or (ii) the 2033 Senior Notes will be called if the holding value is greater than both (a) the redemption price (as defined in the Indenture) and (b) the conversion value plus the coupon make-whole payment at the time. If the 2033 Senior Notes are called, then the holder will maximize their value by finding the optimal decision between (1) redeeming at the redemption price and (2) converting the 2033 Senior Notes.
Using this lattice model, we valued the embedded derivatives using the “with-and-without method,” where the value of the 2033 Senior Notes including the embedded derivatives is defined as the “with,” and the value of the 2033 Senior Notes excluding the embedded derivatives is defined as the “without.” This method estimates the value of the embedded derivatives by looking at the difference in the values between the 2033 Senior Notes with the embedded derivatives and the value of the 2033 Senior Notes without the embedded derivatives.
The lattice model requires the following inputs: (i) price of our Common Stock; (ii) Conversion Rate (as defined in the Indenture); (iii) Conversion Price (as defined in the Indenture); (iv) maturity date; (v) risk-free interest rate; (vi) estimated stock volatility; and (vii) estimated credit spread for the Company.
The following table sets forth the inputs to the lattice model used to value the embedded derivative:
 
December 31, 2014
 
December 31, 2013
 
Issuance Date
Stock price
$9.99
 
$8.44
 
$6.20
Conversion Rate
141.4827
 
141.4827
 
141.4827
Conversion Price
$7.07
 
$7.07
 
$7.07
Maturity date
February 1, 2033
 
February 1, 2033
 
February 1, 2033
Risk-free interest rate
1.40%
 
1.78%
 
1.12%
Estimated stock volatility
39%
 
55%
 
40%
Estimated credit spread
1,081 basis points
 
828 basis points
 
944 basis points

The following table sets forth the fair value of the 2033 Senior Notes with and without the embedded derivatives, and the fair value of the embedded derivatives at December 31, 2014, December 31, 2013, and January 30, 2013. At December 31, 2014, December 31, 2013, and January 30, 2013, the principal amount of the 2033 Senior Notes was $87.6 million, $158.1 million and $175.0 million, respectively:
(In thousands)
December 31, 2014
 
December 31, 2013
 
Issuance Date
Fair value of 2033 Senior Notes:
 
 
 
 
 
With the embedded derivatives
$
129,009

 
$
218,081

 
$
175,000

Without the embedded derivatives
$
63,062

 
$
116,994

 
$
115,796

Estimated fair value of the embedded derivatives
$
65,947

 
$
101,087

 
$
59,204


Changes in certain inputs into the lattice model can have a significant impact on changes in the estimated fair value of the embedded derivatives. For example, a decrease in our estimated credit spread results in an increase in the estimated value of the embedded derivatives. Conversely, a decrease in the price of our Common Stock results in a decrease in the estimated fair value of the embedded derivatives. For the years ended December 31, 2014 and 2013, we observed an increase in the market price of our Common Stock which primarily resulted in a $12.2 million and $52.7 million increase, respectively, in the estimated fair value of our embedded derivatives recorded in Fair value changes of derivative instruments, net in our Consolidated Statements of Operations.
We have line of credit agreements with ten financial institutions as of December 31, 2014 and twelve financial institutions as of December 31, 2013 in Chile and Spain. These lines of credit are used primarily as a source of working capital for inventory purchases.
The following table summarizes the amounts outstanding under the Chilean and Spanish lines of credit:
(Dollars in thousands)
 
 
 
 
 
 Balance Outstanding
Lender
 
Interest rate on
borrowings at December 31, 2014
 
Credit line
capacity
 
December 31,
2014
 
December 31,
2013
Itau Bank
 
6.52%
 
$
1,800

 
965

 
$
1,999

Bank of Chile
 
6.34%
 
2,250

 
1,410

 
2,079

BICE Bank
 
6.16%
 
1,700

 
1,249

 
516

Corp Banca
 
—%
 

 

 
(47
)
BBVA Bank
 
5.00%
 
2,000

 
795

 
523

Penta Bank
 
7.34%
 
1,200

 
1,008

 
946

Security Bank
 
6.16%
 
640

 
361

 
1,075

BCI
 
—%
 

 

 
198

Estado Bank
 
5.30%
 
2,800

 
1,870

 
1,772

Sabadell Bank
 
4.50%
 
182

 

 

BBVA Bank
 
4.75%
 
304

 

 

Santander Bank
 
4.50%
 
243

 

 

Total
 
 
 
$
13,119

 
$
7,658

 
$
9,061


At December 31, 2014 and 2013, the weighted average interest rate on our lines of credit was approximately 6.1% and 7.7%, respectively.
At December 31, 2014 and 2013, we had mortgage notes and other debt related to OPKO Health Europe as follows:
(In thousands)
December 31,
2014
 
December 31,
2013
Current portion of notes payable
$
608

 
$
1,964

Other long-term liabilities
2,435

 
3,270

Total mortgage notes and other debt
$
3,043

 
$
5,234


The mortgages and other debts mature at various dates ranging from 2015 through 2024 bearing variable interest rates from 2.7% up to 6.3%. The weighted average interest rate on the mortgage notes and other debt at December 31, 2014 and 2013, was 3.4% and 3.9%, respectively. The mortgages are secured by our office space in Barcelona.