Sonic Automotive Inc. avoided bankruptcy as bondholders allowed the nation's third-largest dealership group to postpone a $90 million debt payment until 2012.
On April 1, Sonic warned of a possible bankruptcy if it wasn't able to restructure debt that would have matured this week.
In exchange for the delay, Sonic agreed to pay a higher interest rate -- 6 percent instead of 5.25 percent.
According to a report by analyst Rich Kwas of Wachovia Capital Markets, $86 million of the $90 million will be refinanced at 6 percent interest. For the remaining $4 million, the company will issue 857,616 common shares at $4.58.
Sonic President Scott Smith said he was pleased with the terms.
Each percentage point represents about $1 million a year, so we are paying about $750,000 more per year in interest, Smith said. It could have been worse."
In publicly held Sonic's 10-K annual report, its auditors questioned whether the company could continue to operate as a going concern. This going concern notice put Sonic in violation of some of its debt covenants.
Now that Sonic has rescheduled its debt, Smith said, the company is in compliance with its lending agreements. The amendment removes the going-concern qualification for 2008, Kwas wrote.
The new agreements should alleviate investor concerns regarding near-term liquidity, he wrote. As such, the shares should react favorably.
Sonic, of Charlotte, N.C., ranks No. 3 on the Automotive News list of the top 125 U.S. dealership groups for 2008.