CVS 2007 Annual Report Download - page 34

30 I CVS Caremark
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may be redeemed at any time, in whole or in part at a defined
redemption price plus accrued interest. Net proceeds from the
2006 Notes were used to repay a portion of the outstanding
commercial paper issued to finance the Standalone Drug
Business. To manage a portion of the risk associated with
potential changes in market interest rates, during the second
quarter of 2006 we entered into forward starting pay fixed rate
swaps (the “Swaps”), with a notional amount of $750 million.
The Swaps settled in conjunction with the placement of the long-
term financing. As of December 29, 2007 and December 30,
2006, we had no freestanding derivatives in place.
Our credit facilities, unsecured senior notes and ECAPS contain
customary restrictive financial and operating covenants. These
covenants do not include a requirement for the acceleration of
our debt maturities in the event of a downgrade in our credit
rating. We do not believe the restrictions contained in these
covenants materially affect our financial or operating flexibility.
As of December 29, 2007, our long-term debt was rated “Baa2”
by Moody’s and “BBB+” by Standard & Poor’s, and our commer-
cial paper program was rated “P-2” by Moody’s and “A-2” by
Standard & Poor’s. Upon completion of the Caremark Merger,
Standard & Poor’s raised the Company’s credit watch outlook
from negative to stable. On May 21, 2007, Moody’s also raised
the Company’s credit watch from negative to stable. In assessing
our credit strength, we believe that both Moody’s and Standard &
Poor’s considered, among other things, our capital structure and
financial policies as well as our consolidated balance sheet, our
acquisition of the Standalone Drug Business, the Caremark
Merger and other financial information. Although we currently
believe our long-term debt ratings will remain investment grade,
we cannot guarantee the future actions of Moody’s and/or
Standard & Poor’s. Our debt ratings have a direct impact on our
future borrowing costs, access to capital markets and new store
operating lease costs.
Off-Balance Sheet Arrangements
In connection with executing operating leases, we provide a
guarantee of the lease payments. We finance a portion of our
new store development through sale-leaseback transactions,
which involve selling stores to unrelated parties and then leasing
the stores back under leases that qualify and are accounted for
as operating leases. We do not have any retained or contingent
the November ASR agreement. Pursuant to the terms of the
November ASR agreement, on November 7, 2007, we paid
$2.3 billion to Lehman in exchange for Lehman delivering
37.2 million shares of common stock to us, which were placed
into our treasury account upon delivery. On November 26, 2007,
upon establishment of the minimum number of shares to be
repurchased, Lehman delivered an additional 14.4 million shares
of common stock to us. As of December 29, 2007, the aggregate
51.6 million shares of common stock received pursuant to the
November ASR agreement had been placed into our treasury
account. We may receive up to 5.7 million additional shares of
common stock, depending on the market price of the common
stock, as determined under the November ASR agreement, over
the term of the November ASR agreement, which is currently
expected to conclude during the first quarter of 2008.
Accordingly, the $5.0 billion share repurchase program authorized
by our Board of Directors has been completed pending the final
settlement of the November ASR agreement discussed previously.
We will, however, continue to evaluate alternatives for optimizing
our capital structure on an ongoing basis.
On May 22, 2007, we issued $1.75 billion of floating rate senior
notes due June 1, 2010, $1.75 billion of 5.75% unsecured senior
notes due June 1, 2017, and $1.0 billion of 6.25% unsecured
senior notes due June 1, 2027 (collectively the “2007 Notes”).
Also on May 22, 2007, we entered into an underwriting
agreement with Lehman Brothers, Inc., Morgan Stanley & Co.
Incorporated, Banc of America Securities LLC, BNY Capital
Markets, Inc., and Wachovia Capital Markets, LLC, as representa-
tives of the underwriters pursuant to which we agreed to issue
and sell $1.0 billion of Enhanced Capital Advantaged Preferred
Securities (“ECAPS”) due June 1, 2062 to the underwriters.
The ECAPS bear interest at 6.302% per year until June 1, 2012
at which time they will pay interest based on a floating rate. The
2007 Notes and the ECAPS pay interest semi-annually and may
be redeemed at any time, in whole or in part at a defined redemp-
tion price plus accrued interest. The net proceeds from the 2007
Notes and ECAPS were used to repay the bridge credit facility and
a portion of the outstanding commercial paper borrowings.
On August 15, 2006, we issued $800 million of 5.75% unsecured
senior notes due August 15, 2011 and $700 million of 6.125%
unsecured senior notes due August 15, 2016 (collectively the
“2006 Notes”). The 2006 Notes pay interest semi-annually and