| DEBT |
6. DEBT Convertible senior notes and capped calls Convertible senior notes In February 2020, the Company issued Convertible Senior Notes (the "Notes") with an aggregate principal amount of $600 million, due March 1, 2025, in a private placement. The proceeds from the Notes were used or are anticipated to be used for the Capped Call Transactions (described below), working capital, and other general corporate purposes. There are no required principal payments prior to the maturity of the Notes. The Notes accrue interest at an annual rate of 0.75%, payable semi-annually in arrears on March 1 and September 1, beginning on September 1, 2020. Proceeds from the Notes and Capped Call Transactions: | | | | | | | | | | (in thousands) | | Amount | | Principal | $ | 600,000 | | | Less: issuance costs | (14,527) | | | Less: Capped Call Transactions | (51,900) | | | | $ | 533,573 | |
Conversion rights The conversion rate is 7.4045 shares of common stock per $1,000 principal amount of the Notes, representing an initial conversion price of approximately $135.05 per share of common stock. The Company will settle conversions by paying or delivering, as applicable, cash, shares of its common stock, or a combination of cash and shares of its common stock, at the Company’s election, based on the applicable conversion rate. The conversion rate will be adjusted upon the occurrence of certain events, including spin-offs, tender offers, exchange offers, and certain stockholder distributions. Beginning on September 1, 2024, noteholders may convert their Notes at any time at their election. Before September 1, 2024, noteholders may convert their Notes in the following circumstances: •During any calendar quarter commencing after the calendar quarter ending on June 30, 2020 (and only during such calendar quarter), if the last reported sale price per share of the Company’s common stock exceeds one hundred and thirty percent (130%) of the conversion price for each of at least twenty (20) trading days (whether or not consecutive) during the thirty (30) consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter. •During the five consecutive business days immediately after any five consecutive trading day period (the “Measurement Period”), if the trading price per $1,000 principal amount of Notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price per share of common stock on such trading day and the conversion rate on such trading day. •Upon the occurrence of certain corporate events or distributions, or if the Company calls all or any Notes for redemption, then the noteholder of any Note may convert such Note at any time before the close of business on the business day immediately before the related redemption date (or if the Company fails to pay the redemption price due on such redemption date in full, at any time until the Company pays such redemption price in full). As of September 30, 2020, no Notes were eligible for conversion at the noteholders’ election. Repurchase rights On or after March 1, 2023 and on or before the 40th scheduled trading day immediately before the maturity date, the Company may redeem for cash all or part of the Notes, at a repurchase price equal to 100% of the principal amount, plus accrued and unpaid interest, if the last reported sale price of the Company’s common stock exceeded 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which the Company provides a redemption notice. If certain corporate events that constitute a “Fundamental Change” (as described below) occur at any time, each noteholder will have the right, at such noteholder’s option, to require the Company to repurchase for cash all of such noteholder’s Notes, or any portion of the principal thereof that is equal to $1,000 or an integral multiple of $1,000, at a repurchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest. A fundamental change relates to events such as mergers, changes in control of the Company, liquidation/dissolution of the Company, or the delisting of the Company’s common stock. Impact of the Notes In accounting for the transaction, the Notes have been separated into liability and equity components. •The initial carrying amount of the liability component was calculated by measuring a similar debt instrument’s fair value that does not have an associated conversion feature. The excess of the Notes’ principal amount over the initial carrying amount of the liability component, the debt discount, is amortized as interest expense over the Notes’ contractual term. •The equity component was recorded as an increase to additional paid-in capital and is not remeasured as long as it continues to meet the conditions for equity classification. The Company incurred issuance costs of $14.5 million related to the Notes, allocated between the Notes’ liability and equity components proportionate to the initial carrying amount of the liability and equity components. •Issuance costs attributable to the liability component are recorded as an offset to the Notes’ principal balance. They are amortized as interest expense using the effective interest method over the contractual term of the Notes. •Issuance costs attributable to the equity component are recorded as an offset to the equity component in additional paid-in capital and are not amortized. Net carrying amount of the liability component: | | | | | | | | | (in thousands) | September 30, 2020 | | | | Principal | $ | 600,000 | | | | | Unamortized debt discount | (75,061) | | | | | Unamortized issuance costs | (11,145) | | | | | $ | 513,794 | | | |
Net carrying amount of the equity component, included in additional paid-in capital: | | | | | | | | | (in thousands) | September 30, 2020 | | | Conversion options (1) | $ | 61,604 | | | |
(1) Net of issuance costs and taxes. Interest expense related to the Notes: | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended
September 30, | | Nine Months Ended
September 30, | | (in thousands) | 2020 | | 2019 | | 2020 | | 2019 | Contractual interest expense (0.75% coupon) | $ | 1,125 | | | $ | — | | | $ | 2,700 | | | $ | — | | Amortization of debt discount (1) | 3,807 | | | — | | | 9,060 | | | — | | Amortization of issuance costs (1) | 565 | | | — | | | 1,345 | | | — | | | $ | 5,497 | | | $ | — | | | $ | 13,105 | | | $ | — | |
(1) Amortized based upon an effective interest rate of 4.31%. Future payments of principal and contractual interest: | | | | | | | | | | | | | | | | | | | September 30, 2020 | | (in thousands) | Principal | | Interest | | Total | | 2020 | $ | — | | | $ | — | | | $ | — | | | 2021 | — | | | 4,500 | | | 4,500 | | | 2022 | — | | | 4,500 | | | 4,500 | | | 2023 | — | | | 4,500 | | | 4,500 | | | 2024 | — | | | 4,500 | | | 4,500 | | | 2025 | 600,000 | | | 1,488 | | | 601,488 | | | $ | 600,000 | | | $ | 19,488 | | | $ | 619,488 | |
Capped call transactions In February 2020, the Company entered into privately negotiated capped call transactions (“Capped Call Transactions”) with certain financial institutions. The Capped Call Transactions cover approximately 4.4 million shares (representing the number of shares for which the Notes are initially convertible) of the Company’s common stock. They are generally expected to reduce potential dilution to the common stock upon any conversion of Notes and/or offset any potential cash payments the Company is required to make in excess of the principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a cap. The cap price of the Capped Call Transactions is $196.44, subject to adjustment upon the occurrence of specified extraordinary events affecting the Company, including merger events and tender offers. The Capped Call Transactions are accounted for as derivative instruments. The Capped Call Transactions do not qualify for the Company’s own equity scope exception in ASC 815 since, in some cases of early settlement, the settlement value of the Capped Call Transactions, calculated in accordance with the governing documents, may not represent a fair value measurement. The Capped Call Transactions are classified as “other long term assets” and remeasured to fair value at the end of each reporting period, resulting in a non-operating gain or loss. Change in value of Capped Call Transactions: | | | | | | | (in thousands) | Nine Months Ended
September 30, 2020 | | Value at issuance | $ | 51,900 | | | Fair value adjustment | 19,816 | | | Balance as of September 30, | $ | 71,716 | |
Credit facility In November 2019, and as amended in February 2020, July 2020, and October 2020, the Company entered into a five-year $100 million senior secured revolving credit agreement (the “Credit Facility”) with PNC Bank, National Association (“PNC”). The Company may use borrowings to finance working capital needs and for general corporate purposes. Subject to specific conditions, the Credit Facility allows the Company to increase the aggregate commitment to $200 million. The commitments expire on November 4, 2024, and any outstanding loans will be payable on such date. The Credit Facility, as amended, contains customary covenants, including, but not limited to, those relating to additional indebtedness, liens, asset divestitures, and affiliate transactions. The Company is also required to comply with financial covenants, including: •Beginning with the fiscal quarter ended on September 30, 2020 and ending with the fiscal quarter ended December 31, 2021 at least $200 million in cash and investments held by Pegasystems Inc. •Beginning with the quarter ended on March 31, 2022 a maximum net consolidated leverage ratio of 3.5 to 1.0 (with a step-up in the event of certain acquisitions) and a minimum consolidated interest coverage ratio of 3.5 to 1.0. As of September 30, 2020 and December 31, 2019, we had no outstanding borrowings under the Credit Facility.
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