IBM 2008 Annual Report Download - page 92


Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION and Subsidiary Companies
Management Discussion ............................................................................................. 18
Consolidated Statements ............................................................................................ 60
Notes ............................................................................................................................... 66
A – E ........................................................................................................................66
F – J ........................................................................................................................86
K– Q .......................................................................................................................88
K. BORROWINGS .................................................................................................88
L. DERIVATIVES AND HEDGING TRANSACTIONS ..............................................90
M. OTHER LIABILITIES ..........................................................................................94
N. STOCKHOLDERS’ EQUITY ACTIVITY ...............................................................95
O. CONTINGENCIES AND COMMITMENTS ..........................................................97
P. TAXES ...............................................................................................................99
Q. RESEARCH, DEVELOPMENT AND ENGINEERING ......................................... 101
R –W ..................................................................................................................... 102
Pre-swap annual contractual maturities of long-term debt outstand-
ing at December , , are as follows:
($  )
2009 $ 8,931
2010 2,170
2011 3,097
2012 3,078
2013 2,557
2014 and beyond 10,668
TOTAL $30,502
  
($  )
For the year ended December : 2008 2007 2006
Cost of financing $ 788 $ 811 $ 692
Interest expense 687 753 398
Net investment derivative activity (13) (142) (120)
Interest capitalized 15 9 11
TOTAL INTEREST PAID AND ACCRUED $1,477 $1,431 $ 981
Refer to the related discussion on page  in note V, “Segment Infor-
mation,” for total interest expense of the Global Financing segment.
See note L, “Derivatives and Hedging Transactions,” on pages  to
 for a discussion of the use of currency and interest rate swaps in
the company’s debt risk management program.
  
The company maintains a five-year, $ billion Credit Agreement
(the Credit Agreement), which expires on June , . The total
expense recorded by the company related to this facility was $. mil-
lion in , $. million in  and $. million in . The
amended Credit Agreement permits the company and its Subsidiary
Borrowers to borrow up to $ billion on a revolving basis.
Borrowings of the Subsidiary Borrowers will be unconditionally
backed by the company. The company may also, upon the agreement
of either existing lenders, or of the additional banks not currently
party to the Credit Agreement, increase the commitments under the
Credit Agreement up to an additional $. billion. Subject to cer-
tain terms of the Credit Agreement, the company and Subsidiary
Borrowers may borrow, prepay and reborrow amounts under the
Credit Agreement at any time during the Credit Agreement. Interest
rates on borrowings under the Credit Agreement will be based on
prevailing market interest rates, as further described in the Credit
Agreement. The Credit Agreement contains customary representations
and warranties, covenants, events of default, and indemnification
provisions. The company believes that circumstances that might give
rise to breach of these covenants or an event of default, as specified in
the Credit Agreement are remote. The company’s other lines of credit,
most of which are uncommitted, totaled approximately $, mil-
lion and $, million at December ,  and , respectively.
Interest rates and other terms of borrowing under these lines of credit
vary from country to country, depending on local market conditions.
($  )
At December : 2008 2007
Unused lines:
From the committed global credit facility
$ 9,888 $ 9,792
From other committed and uncommitted lines 8,376 7,895
TOTAL UNUSED LINES OF CREDIT $18,264 $17,687
Note L.
Derivatives and Hedging Transactions
The company operates in multiple functional currencies and is a
significant borrower and lender in the global markets. In the normal
course of business, the company is exposed to the impact of interest
rate changes and foreign currency fluctuations, and to a lesser extent
equity price changes and client credit risk. The company limits these
risks by following established risk management policies and proce-
dures, including the use of derivatives, and, where cost effective,
financing with debt in the currencies in which assets are denominated.
For interest rate exposures, derivatives are used to align rate move-
ments between the interest rates associated with the company’s lease
and other financial assets and the interest rates associated with its
financing debt. Derivatives are also used to manage the related cost
of debt. For foreign currency exposures, derivatives are used to limit
the effects of foreign exchange rate fluctuations on financial results.
As a result of the use of derivative instruments, the company is
exposed to the risk that counterparties to derivative contracts will fail
to meet their contractual obligations. To mitigate the counterparty
credit risk, the company has a policy of only entering into contracts
with carefully selected major financial institutions based upon their
credit ratings and other factors, and maintains strict dollar limits
that correspond to each institution’s credit rating. The company’s
established policies and procedures for mitigating credit risk on
principal transactions include reviewing and establishing limits for
credit exposure and continually assessing the creditworthiness of
counterparties. Master agreements with counterparties include mas-
ter netting arrangements as further mitigation of credit exposure to