OfficeMax 2009 Annual Report Download - page 65

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($817.5 million to each of Lehman and Wachovia). Lehman and Wachovia issued collateral notes
(the ‘‘Collateral Notes’’) to the Note Issuers. Concurrently with the issuance of the Installment and
Collateral Notes, Lehman and Wachovia guaranteed the respective Installment Notes and the Note
Issuers pledged the Collateral Notes as security for the performance of the Installment Note
obligations.
In December 2004, we completed a securitization transaction in which the Company’s interests
in the Installment Notes and related guarantees were transferred to wholly-owned bankruptcy
remote subsidiaries. The subsidiaries pledged the Installment Notes and related guarantees and
issued securitized notes (the ‘‘Securitization Notes’’) in the amount of $1,470 million ($735 million
through the structure supported by the Lehman guaranty and $735 million through the structure
supported by the Wachovia guaranty). Recourse on the Securitization Notes is limited to the
proceeds of the applicable pledged Installment Notes and underlying Lehman or Wachovia
guaranty, and therefore there is no recourse against OfficeMax. The Securitization Notes are 15-year
non-amortizing, and were issued in two equal $735 million tranches paying interest of 5.54% and
5.42%, respectively. The Securitization Notes are reported as non-recourse debt in the Company’s
Consolidated Balance Sheets.
As a result of these transactions, we received $1,470 million in cash. The subsidiaries were
expected to earn approximately $82.5 million per year in interest income on the Installment Notes
receivable and expected to incur annual interest expense of approximately $80.5 million on the
Securitization Notes. The pledged Installment Notes receivable and Securitization Notes payable
were scheduled to mature in 2020 and 2019, respectively. The Securitization Notes have an initial
term that is approximately three months shorter than the Installment Notes. We expected to
refinance our ownership of the Installment Notes in 2019 with a short-term secured borrowing to
bridge the period from initial maturity of the Securitization Notes to the maturity of the Installment
Notes.
On September 15, 2008, Lehman, the guarantor of half of the Installment Notes and the
Securitization Notes, filed a petition in the United States Bankruptcy Court for the Southern District
of New York seeking relief under chapter 11 of the United States Bankruptcy Code. Lehman’s
bankruptcy filing constituted an event of default under the $817.5 million Installment Note
guaranteed by Lehman.
We are required for accounting purposes to assess the carrying value of assets whenever
circumstances indicate that a decline in value may have occurred. After evaluating the situation, we
concluded in late October 2008 that as a result of the Lehman bankruptcy, it was probable that we
would be unable to collect all amounts due according to the contractual terms of the Installment
Note guaranteed by Lehman (the ‘‘Lehman Guaranteed Installment Note’’). Accordingly, we
evaluated the carrying value of the Lehman Guaranteed Installment Note and reduced it to the
estimated amount we expect to collect ($81.8 million) by recording a non-cash impairment charge
of $735.8 million, pre-tax, in the third quarter of 2008. We based our estimate of the recoverable
amount of the Lehman Guaranteed Installment Note on a variety of factors, including consultations
with financial advisors and review of the trading prices on outstanding Lehman debt instruments
with similar contractual interest rates and maturities.
Recourse on the Securitization Notes is limited to the proceeds from the applicable pledged
Installment Notes and underlying Lehman and Wachovia guaranty. Accordingly, the Lehman
Guaranteed Installment Note and underlying guarantees by Lehman will be transferred to the
holders of the Securitization Notes guaranteed by Lehman in order to settle and extinguish that
liability. However, under current generally accepted accounting principles, we are required to
continue to recognize the liability related to the Securitization Notes guaranteed by Lehman until
such time as the liability has been extinguished. This will occur when the Lehman Guaranteed
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