IBM 2009 Annual Report Download - page 94

Notes to Consolidated Financial Statements
INTERNATIONAL BUSINESS MACHINES CORPORATION AND SUBSIDIARY COMPANIES
Pre-swap annual contractual maturities of long-term debt out-
standing at December 31, 2009, are as follows:
($ in millions)
2010 $ 2,251
2011 3,953
2012 3,096
2013 3,778
2014 1,516
2015 and beyond 9,414
Total $24,008
Debt Exchange
During the fourth quarter of 2009, the company completed an
exchange of approximately $500 million principal amount of
its 7.125 percent debentures due 2096, $123 million principal
amount of its 7 percent debentures due 2045 and $813 million
principal amount of its 8 percent notes due 2038, for approxi-
mately $1.5 billion of 5.60 percent senior notes due 2039 and
cash of approximately $376 million. The exchange was con-
ducted to retire high coupon long-dated debt in a favorable
interest rate environment.
The debt exchange was accounted for as a non-revolving
debt modification in accordance with U.S. GAAP and therefore
it did not result in any gain or loss recorded in the Consolidated
Statement of Earnings. Cash payments made will be amortized
over the life of the new debt. Upfront fees with third parties in
relation to the exchange were expensed as incurred.
Interest on Debt
($ in millions)
For the year ended December 31: 2009 2008 2007
Cost of financing $ 706 $ 788 $ 811
Interest expense 404 687 753
Net investment derivative activity (1) (13) (142)
Interest capitalized 13 15 9
Total interest paid and accrued $1,122 $1,477 $1,431
Refer to the related discussion on page 124 in note V, “Seg ment
Infor mation,” for total interest expense of the Global Financing
segment. See note L, “Derivatives and Hedging Transactions,”
on pages 92 through 96 for a discussion of the use of currency
and interest rate swaps in the company’s debt risk manage-
ment program.
Lines of Credit
The company maintains a five-year, $10 billion Credit Agreement
(the “Credit Agreement”), which expires on June 28, 2012. The
total expense recorded by the company related to this facility
was $6.3 million in 2009, $6.2 million in 2008 and $6.2 million
in 2007. The amended Credit Agreement permits the company
and its Subsidiary Borrowers to borrow up to $10 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
$2.0 billion. Subject to certain 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
$9,790 million and $11,031 million at December 31, 2009 and
2008, respectively. Interest rates and other terms of borrowing
under these lines of credit vary from country to country, depend-
ing on local market conditions.
($ in millions)
At December 31: 2009 2008
Unused lines:
From the committed global credit facility $ 9,910 $ 9,888
From other committed and uncommitted lines 7,405 8,376
Total unused lines of credit $17,314 $18,264
Note L.
Derivatives and Hedging Transactions
The company operates in multiple functional currencies and is
a significant lender and borrower in the global markets. In the
normal course of business, the company is exposed to the
impact of interest rate changes and foreign currency fluctua-
tions, and to a lesser extent equity changes and client credit
risk. The company limits these risks by following established
risk management policies and procedures, 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 better align rate movements
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 better manage the cash flow volatility arising from
foreign exchange rate fluctuations.
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