rrowings have increased substantially from 1995 to 1996. This indicates that Reebok will have difficulty raising additional long-term funds at previous cost levels as investors are likely to see additional risk which was not previously present.
Reebok recently incurred $640 million in additional debt to finance the repurchase of shares; $50 million of this was prepaid in February 1997. In addition, Reebok entered into a $750 million revolving credit line which replaced its prior $300 million revolving credit facility. As a result of these new credit arrangements, Reebok faces significantly increased interest expense and debt amortization. The credit arrangements contain certain covenants (including restrictions on asset acquisitions, capital expenditures and future indebtedness, and the requirement to maintain a minimum interest coverage ratio) which are intended to limit Reebok's future actions and which may also limit Reebok's financial, operating and strategic flexibility and options. In addition, Reebok's failure to make timely payments of interest and principal on its debt, or to comply with the covenants, could result in significant negative consequences.
Currently, the bulk of Reebok's debt is in the form of a variable rate term loan with the final payment due in 2002 and interest payable quarterly; the outstanding balance at the end of 1996 was $640,000. The company also has several medium term notes, with interest rates ranging between 6 percent and 6.75 percent (due in 2000 and 1998), and 6.75 percent debentures due in 2005; interest on all of these debt instruments is payable semiannually (1996 Reebok 10-K, 37).
At this point, the company has severely limited its ability to borrow additional funds due to the covenants attached to its current capital structure. This forces the company to consider equity financing as the primary financial instrument, but the recent stock performance suggests that the company may...