Sprint - Nextel 2012 Annual Report Download - page 190

Table of Contents
recorded as a capital lease obligation. The initial non
- cancelable term of these capital leases are three to twelve years and may include one or more
renewal options at the end of the initial lease term that may be exercised at our discretion. Lease payments for the initial lease term and any fixed
renewal periods are established at the inception of the lease and interest expense is recognized using the effective interest rate method based on the
rate imputed using the contractual terms of the lease.
Our lease agreements may contain change of control provisions. In certain agreements, a change of control may exclude a change of control by
permitted holders including, but not limited to, Sprint, any of its successors and its respective affiliates. Other agreements may reference circumstances
involving a change of control resulting in Clearwire's credit rating falling below “
Caa1 ” as rated by Moody's Investors Service. Upon the occurrence of
a change of control, the lessor may require payment of a predetermined casualty value of the leased equipment
Future Payments —
For future payments on our long - term debt see Note 13, Commitments and Contingencies.
Interest Expense —
Interest expense included in our consolidated statements of operations for the years ended December 31, 2012, 2011 and
2010, consisted of the following (in thousands):
_______________________________________
The holders
’ exchange rights contained in the Exchangeable Notes constitute embedded derivative instruments that are required to be
accounted for separately from the debt host instrument at fair value. As a result, upon the issuance of the Exchangeable Notes, we recognized
Exchange Options, with an estimated fair value of $231.5 million as a derivative liability. As a result of the Exchange Transaction, $100.0 million in par
value of the Exchangeable Notes were retired and the related Exchange Options, with a notional amount of 14.1 million shares, were settled at fair value.
The Exchange Options are indexed to Class A Common Stock, have a notional amount of 88.9 million and 103.0 million shares at December 31, 2012 and
2011, respectively, and mature in 2040.
We do not apply hedge accounting to the Exchange Options. Therefore, gains and losses due to changes in fair value are reported in our
consolidated statements of operations. At December 31, 2012 and 2011, the Exchange Options
’ estimated fair value of $5.3 million and $8.2 million,
respectively, was reported in Other current liabilities on our consolidated balance sheets. For the years ended December 31, 2012, 2011 and 2010, we
recognized gains of $1.4 million, $159.7 million and $63.6 million, respectively, from the changes in the estimated fair value in Gains on derivative
instruments in our consolidated statements of operations. See Note 12, Fair Value, for information regarding valuation of the Exchange Options.
In addition, in the event of an issuance of New Securities, certain existing equityholders are entitled to the pre
- emptive rights which allow them
to purchase their pro
- rata share of the New Securities at the issuance price less any underwriting discounts. This right is considered a derivative that
is required to be recorded at fair value and has a payment provision based on the existing equityholders' pro - rata ownership interest in Clearwire. We
do not apply hedge accounting to this derivative. A portion of the derivative was settled on December 13, 2011 with the issuance of Class B Common
Stock and Class B Common Interests to Sprint and we recorded a charge of
$15.9 million for the year ended December 31, 2011 in Gains on derivative
instruments in our consolidated statements of operations representing the value of the derivative. The fair value of this derivative is determined by,
among other things, the probability of a New Securities issuance, the probability that existing equityholders will participate in any new issuance and
the extent of their participation, if any.
F - 68
Year Ended December 31,
2012
2011
2010
Interest coupon (1)
$
518,671
$
484,599
$
346,984
Accretion of debt discount and amortization of debt premium, net(2)
41,386
40,216
14,479
Capitalized interest
(6,598
)
(18,823
)
(208,595
)
Total interest expense
$
553,459
$
505,992
$
152,868
(1)
The year ended December 31, 2012 included $2.5 million of coupon interest relating to the Exchangeable Notes, which was settled in the non- cash Exchange
Transaction.
(2)
Includes non-cash amortization of deferred financing fees which are classified as Other assets on the consolidated balance sheets.
11.
Derivative Instruments