v3.22.2.2
Debt
 9 Months Ended
Oct. 31, 2022
Debt Disclosure [Abstract]  
Debt
Note 9. Debt
2029 Notes
On March 24, 2022 (Initial Closing Date), we issued convertible senior notes (Initial Notes) in the aggregate principal amount of $250.0 million pursuant to an investment agreement (Investment Agreement) and indenture agreement (Indenture) to certain entities affiliated with Silver Lake Alpine II, L.P. (Silver Lake). Pursuant to the Investment Agreement, additional convertible senior notes in the aggregate principal amount of $150.0 million (Additional Notes), (together with the Initial Notes, the “2029 Notes”) shall be issued to Silver Lake 18 months after the Initial Closing Date, with an earlier issuance upon our completion of a Material Acquisition that meets the conditions described in Section 2.02(a) of the Investment Agreement. In addition, in the event that a Change in Control (as defined in the Indenture) occurs prior to the Additional Notes being issued, the noteholder would have the right to receive, at the noteholder's election, the Additional Notes, a cash payment, or common stock, as described in Section 2.02(b) of the Investment Agreement. The Initial Notes and the Additional Notes, once issued, represent senior unsecured obligations of Zuora.
As a condition of the Investment Agreement, we also issued warrants to Silver Lake to acquire up to 7.5 million shares of Class A common stock (Warrants), of which (i) up to 2.5 million Warrants are exercisable at $20.00 per share, (ii) up to 2.5 million Warrants are exercisable at $22.00 per share and (iii) up to 2.5 million Warrants are exercisable at $24.00 per share. The Warrants are exercisable for a period of seven years from the Initial Closing Date.
The purchase price of the 2029 Notes is 98% of the par value. The 2029 Notes bear interest at a rate of 3.95% per annum, payable quarterly in cash, provided that we have the option to pay interest in kind at 5.50% per annum. If elected, any such paid in kind interest will be added to the principal balance at each quarterly interest payment date. The 2029 Notes will mature on March 31, 2029, subject to earlier conversion or redemption. The Initial Notes are convertible at Silver Lake’s option into shares of our Class A common stock at an initial conversion rate of 50.0 shares per $1,000 principal amount ($20.00 per share, representing 12.5 million shares of Class A common stock), subject to customary anti-dilution adjustments. Any 2029 Notes that are converted in connection with a Make-Whole Fundamental Change (as defined in the Indenture) are subject to an increase in the conversion price under certain circumstances.
With certain exceptions, upon a Fundamental Change, the holders of the 2029 Notes may require that we repurchase all or part of the principal amount of the 2029 Notes at a purchase price equal to the principal amount and accrued but unpaid interest outstanding, plus the total sum of all remaining scheduled interest payments through the remainder of the term of the 2029 Notes, at the 5.50% paid in kind interest rate. At any time on or after the fifth anniversary of the Initial Closing Date, the holders of the 2029 Notes may require that we repurchase all or part of the principal amount of the Notes at a purchase price equal to the principal amount plus accrued interest through the date of repurchase. Upon certain events of default, the 2029 Notes may be declared due and payable (or will automatically become so under certain events of default), at a purchase price equal to the principal amount plus accrued interest through the date of repurchase. We have no right to redeem the 2029 Notes prior to maturity.
Pursuant to the Investment Agreement, without our prior written consent, Silver Lake is restricted from converting any 2029 Note, exercising any Warrant or transferring any 2029 Note or Warrant to parties other than affiliates or members of Silver Lake (with certain limited exceptions) for 18 months following the Initial Closing Date, or if sooner, upon the consummation of any Change in Control (as defined in the Investment Agreement) or entry into a definitive agreement for a transaction that, if consummated, would result in a Change in Control.
We determined that the Initial Notes arrangement consisted of three freestanding instruments: the Initial Notes, the Warrants and the loan commitment related to the Additional Notes. In addition, we evaluated the embedded features in the Initial Notes and identified certain embedded features which were not clearly and closely related to the Initial Notes and met the definition of a derivative, and therefore required bifurcation from the host contract. We determined that the fair value of these bifurcated derivatives was de minimis as of the Initial Closing Date and as of October 31, 2022.
As further discussed in Note 17. Warrants to Purchase Shares of Common Stock, a portion of the Warrants issued were determined to require liability classification with the remaining Warrants eligible to be classified in stockholders’ equity. As such, we allocated the proceeds obtained from the Initial Notes first to the liability-classified Warrants and then, on a relative fair value basis, between the equity-classified Warrants and the Initial Notes.
We incurred approximately $8.1 million of debt issuance costs associated with the 2029 Notes and Warrants. Of this amount, we allocated $7.1 million as a component of the discount on the 2029 Notes, $0.7 million against the proceeds allocated to the equity-classified Warrants and $0.3 million was allocated to the liability-classified Warrants and recorded to General and administrative expense in the accompanying unaudited condensed consolidated statements of comprehensive loss. The 2029 Notes debt discount is being amortized using the effective interest rate method over the five year expected life of the 2029 Notes (representing the period from the contract date to the earliest noncontingent put date of May 24, 2027) and reflects an effective interest rate of 8.5%.
The carrying value of the Initial Notes was classified as long-term and consisted of the following (in thousands):
October 31, 2022
Initial Notes principal$250,000 
Unamortized discount(41,607)
Carrying value$208,393 
Interest expense related to the Initial Notes, included in Interest expense in the accompanying unaudited condensed consolidated statements of comprehensive loss, was as follows (in thousands):
Three Months Ended October 31, 2022Nine Months Ended October 31, 2022
Contractual interest expense$2,469 $5,953 
Amortization of deferred loan costs1,967 4,634 
Total interest expense$4,436 $10,587 
Debt Agreement
We have an agreement with Silicon Valley Bank for a revolving loan facility, which is secured by a lien on substantially all of our non-IP assets (Debt Agreement). In October 2022 we amended the Debt Agreement, which extended the $30.0 million revolving loan facility to October 2025. The interest rate under the revolving loan facility is equal to the prime rate published by the Wall Street Journal minus 1.00%. We had not drawn down any amounts as of October 31, 2022.
The Debt Agreement also included a term loan facility, under which we borrowed $15.0 million in June 2017 to partially finance the acquisition of Leeyo Software, Inc. The term loan facility fully matured in June 2022. We made term loan principal and interest payments totaling $1.5 million in fiscal 2023, including the final term loan principal and interest payment of $0.4 million during the three months ended July 31, 2022, and paid a fee of 1.5% of the original principal amount of the term loan facility, or $225,000, upon termination of the facility.