Walgreens 2013 Annual Report Download - page 42

Notes to Consolidated Financial Statements (continued)
40 2013 Walgreens Annual Report
On September 13, 2012, the Company repaid in full all amounts borrowed under the
bridge term loan with a portion of the net proceeds from a public offering of $4.0 billion
of notes with varying maturities and interest rates, the majority of which are fixed rate.
The following details each tranche of notes issued on September 13, 2012:
Notes Issued
(In millions): Maturity Date Interest Rate Interest Payment Dates
$ 550 March 13, 2014 Variable; three-month March 13, June 13,
U.S. Dollar LIBOR, September 13 and
reset quarterly, December 13;
plus 50 basis points commencing on
December 13, 2012
750 March 13, 2015 Fixed 1.000% March 13 and
September 13;
commencing on
March 13, 2013
1,000 September 15, 2017 Fixed 1.800% March 15 and
September 15;
commencing on
March 15, 2013
1,200 September 15, 2022 Fixed 3.100% March 15 and
September 15;
commencing on
March 15, 2013
500 September 15, 2042 Fixed 4.400% March 15 and
September 15;
commencing on
March 15, 2013
$ 4,000
The Company may redeem the fixed rate notes at its option, at any time in whole, or
from time to time in part, at a redemption price equal to the greater of: (1) 100% of the
principal amount of the notes being redeemed; and (2) the sum of the present values of
the remaining scheduled payments of principal and interest thereon (not including any
portion of such payments of interest accrued as of the date of redemption), discounted
to the date of redemption on a semiannual basis (assuming a 360-day year consisting
of twelve 30-day months) at the Treasury Rate (as defined), plus 12 basis points for the
notes due 2015, 20 basis points for the notes due 2017, 22 basis points for the notes
due 2022 and 25 basis points for the notes due 2042. If a change of control triggering
event occurs, the Company will be required, unless it has exercised its right to redeem
the notes, to offer to purchase the notes at a purchase price equal to 101% of their
principal amount, plus accrued and unpaid interest, if any, on the notes repurchased
to the date of repurchase. The notes are unsecured senior debt obligations and rank
equally with all other unsecured and unsubordinated indebtedness of the Company.
Total issuance costs relating to the notes, including underwriting discounts and fees,
were $26 million. The fair value of the notes as of August 31, 2013, was $3.9 billion.
Fair value for these notes was determined based upon quoted market prices.
On January 13, 2009, the Company issued notes totaling $1.0 billion bearing an interest
rate of 5.250% paid semiannually in arrears on January 15 and July 15 of each year,
beginning on July 15, 2009. The notes will mature on January 15, 2019. The Company
may redeem the notes, at any time in whole or from time to time in part, at its option
at a redemption price equal to the greater of: (1) 100% of the principal amount of the
notes to be redeemed; or (2) the sum of the present values of the remaining scheduled
payments of principal and interest, discounted to the date of redemption on a semiannual
basis at the Treasury Rate, plus 45 basis points, plus accrued interest on the notes to
be redeemed to, but excluding, the date of redemption. If a change of control triggering
event occurs, unless the Company has exercised its option to redeem the notes, it will
be required to offer to repurchase the notes at a purchase price equal to 101% of the
principal amount of the notes plus accrued and unpaid interest to the date of redemption.
The notes are unsecured senior debt obligations and rank equally with all other
unsecured senior indebtedness of the Company. The notes are not convertible or
exchangeable. Total issuance costs relating to this offering were $8 million, primarily
in underwriting fees. The fair value of the notes as of August 31, 2013 and 2012, was
$1.1 billion and $1.2 billion, respectively. Fair value for these notes was determined
based upon quoted market prices.
The Company has had no activity or outstanding balances in its commercial paper
program since fiscal 2009. In connection with the commercial paper program,
the Company maintains two unsecured backup syndicated lines of credit that total
$1.35 billion. The first $500 million facility expires on July 20, 2015, and allows for
the issuance of up to $250 million in letters of credit. The second $850 million facility
expires on July 23, 2017, and allows for the issuance of up to $200 million in letters
of credit. The issuance of letters of credit under either of these facilities reduces
available borrowings. The Company’s ability to access these facilities is subject to
compliance with the terms and conditions of the credit facilities, including financial
covenants. The covenants require the Company to maintain certain financial ratios
related to minimum net worth and priority debt, along with limitations on the sale
of assets and purchases of investments. At August 31, 2013, the Company was in
compliance with all such covenants. The Company pays a facility fee to the financing
banks to keep these lines of credit active. At August 31, 2013, there were no letters
of credit issued against these credit facilities and the Company does not anticipate
any future letters of credit to be issued against these facilities.
10. Financial Instruments
The Company uses derivative instruments to manage its interest rate exposure associated
with some of its fixed-rate borrowings. The Company does not use derivative instru-
ments for trading or speculative purposes. All derivative instruments are recognized in
the Consolidated Balance Sheets at fair value. The Company designates interest rate
swaps as fair value hedges of fixed-rate borrowings. For derivatives designated as
fair value hedges, the change in the fair value of both the derivative instrument and
the hedged item are recognized in earnings in the current period. At the inception of
a hedge transaction, the Company formally documents the hedge relationship and the
risk management objective for undertaking the hedge. In addition, it assesses both at
inception of the hedge and on an ongoing basis whether the derivative in the hedging
transaction has been highly effective in offsetting changes in fair value of the hedged
item and whether the derivative is expected to continue to be highly effective.
The impact of any ineffectiveness is recognized currently in earnings.
Counterparties to derivative financial instruments expose the Company to credit-related
losses in the event of nonperformance, but the Company regularly monitors the
creditworthiness of each counterparty.
Cash Flow Hedges
In fiscal 2012, the Company entered into three forward starting interest rate swap
transactions locking in the then current interest rate on $1.0 billion of its anticipated
debt issuance in connection with the Alliance Boots investment. The swaps were
terminated when the hedged debt was issued in September 2012. The swap trans-
actions were designated as cash flow hedges. The Company recorded an immaterial
gain upon termination of the swaps.
Fair Value Hedges
For derivative instruments that are designated and qualify as fair value hedges, the
gain or loss on the derivative, as well as the offsetting gain or loss on the hedged item
attributable to the hedged risk, are recognized in interest expense on the Consolidated
Statements of Comprehensive Income. Fair value changes in derivatives that are
designated and qualify as cash flow hedges are recorded in other comprehensive
income, with any ineffectiveness recorded in interest expense.
In May 2011, the Company entered into interest rate swaps with two counterparties
converting $250 million of its $1.0 billion 5.250% fixed rate notes to a floating interest
rate based on the six-month LIBOR in arrears plus a constant spread. In March 2012,
the Company entered into interest rate swaps with the same two counterparties
converting an additional $250 million of its 5.250% fixed-rate notes to a floating
interest rate based on the one-month LIBOR in arrears plus a constant spread.
In June and July 2013, the Company converted the remaining $500 million 5.250%
fixed-rate notes to variable rate through two $250 million interest rate swaps, each
with a single counterparty. The variable rates for each of the swaps are based on the
six-month LIBOR in arrears plus a constant credit spread. All swap termination dates
coincide with the notes maturity date, January 15, 2019.
In January 2010, the Company entered into six-month LIBOR in arrears swaps with
two counterparties for all of its $1.3 billion 4.875% fixed-rate debt. These swaps
terminated on August 1, 2013, in conjunction with the notes maturity date.