Prudential 2011 Annual Report Download - page 205

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
14. SHORT-TERM AND LONG-TERM DEBT (continued)
During 2007, a subsidiary of Prudential Insurance issued $500 million of 45-year floating-rate surplus notes to an unaffiliated
financial institution. Surplus notes issued under this facility are subordinated to policyholder obligations, and the payment of interest and
principal on them may only be made by the issuer with the prior approval of the Arizona Department of Insurance. Concurrent with the
issuance of these surplus notes, Prudential Financial entered into a credit derivative that will require Prudential Financial to make certain
payments in the event of deterioration in the value of the surplus notes. As of December 31, 2011 and 2010, the credit derivative was a
liability of $77 million and $26 million, respectively, with no requirement to pledge collateral.
During 2006, a subsidiary of Prudential Insurance entered into a surplus note purchase agreement with an unaffiliated financial
institution that provides for the issuance of up to $3,000 million of ten-year floating-rate surplus notes. At both December 31, 2011 and
2010, $2,700 million were outstanding under this agreement. Concurrent with the issuance of each surplus note, Prudential Financial enters
into arrangements with the buyer, which are accounted for as derivative instruments that may result in payments by, or to, Prudential
Financial over the term of the surplus notes, to the extent there are significant changes in the value of the surplus notes. Surplus notes
issued under this facility are subordinated to policyholder obligations, and the payment of interest and principal on them may only be made
by the issuer with the prior approval of the Arizona Department of Insurance. As of December 31, 2011 and 2010, these derivative
instruments had no material value.
Junior Subordinated Notes
In June and July 2008, Prudential Financial issued $600 million of 8.875% fixed-to-floating rate junior subordinated notes to
institutional investors and $920 million of 9% fixed-rate junior subordinated notes to retail investors. Both issuances are considered hybrid
capital securities, which receive enhanced equity treatment from the rating agencies. Both series of notes have a scheduled maturity of
June 15, 2038 and a final maturity of June 15, 2068. Prudential Financial is required to use commercially reasonable efforts, subject to
market disruption events, to raise sufficient proceeds from the issuance of specified qualifying capital securities, which include hybrid
capital securities, to repay the principal of the notes at their scheduled maturity. For the institutional notes, interest is payable semi-annually
at a fixed rate of 8.875% until June 15, 2018, from which date interest is payable quarterly at a floating rate of 3-month LIBOR plus 5.00%.
Prudential Financial may redeem the institutional notes, subject to the terms of the replacement capital covenant (“RCC”), as discussed
below, in whole or in part, on or after June 15, 2018 at their principal amount plus accrued and unpaid interest or prior to June 15, 2018 at a
make-whole price. Prudential Financial may redeem the retail notes, subject to the terms of the RCC as discussed below, on or after
June 15, 2013, in whole or in part, at their principal amount plus accrued and unpaid interest or prior to June 15, 2013, in whole, at a make-
whole price. Both series of notes may also be redeemed in whole upon the occurrence of certain defined events. Prudential Financial has
the right to defer interest payments on either or both series of notes for a period up to ten years, during which time interest will be
compounded. If Prudential Financial were to exercise its right to defer interest it will be required, commencing on the earlier of (i) the first
interest payment date on which current interest is paid after the deferral period or (ii) the fifth anniversary of the deferral period, to issue
specified alternative payment securities, which include but are not limited to Common Stock, to satisfy its obligation with respect to the
deferred interest. In connection with the issuance of both series of notes, Prudential Financial entered into a RCC for the benefit of holders
of the Company’s 6.625% Senior Notes due 2037. Under the RCC, Prudential Financial agreed that it will not repay, redeem, defease, or
purchase these junior subordinated notes prior to June 15, 2048, unless it has received proceeds from the issuance of specified replacement
capital securities, which include but are not limited to hybrid capital securities as well as Common Stock. The RCC will terminate upon the
occurrence of certain events, including acceleration due to an event of default.
Medium-term Notes
Prudential Financial maintains a Medium-term Notes, Series D program under its shelf registration statement with an authorized
issuance capacity of $20 billion. As of December 31, 2011, the outstanding balance of Medium-term notes was $14.1 billion, an increase of
$1.1 billion from December 31, 2010, resulting primarily from $1.5 billion of issuances presented in the below table, partially offset by a
maturity of $0.4 billion.
Issue Date Face Value Interest Rate Maturity Date
(in millions)
May 12, 2011 ........................................................ $500 3.000% May 12, 2016
May 12, 2011 ........................................................ $300 5.625% May 12, 2041
November 16, 2011 ................................................... $400 4.500% November 16, 2021
November 16, 2011 ................................................... $325 5.800% November 16, 2041
Retail Medium-term Notes
Prudential Financial also maintains a retail medium-term notes program, including the InterNotes®program, under its shelf
registration statement with an authorized issuance capacity of $5.0 billion. As of December 31, 2011, the outstanding balance of retail notes
was $2.6 billion, a decrease of $154 million from December 31, 2010, resulting primarily from maturities and redemptions at the request of
the Company.
Star and Edison Businesses Acquisition
On February 1, 2011, the Company completed the acquisition of the Star and Edison Businesses from AIG. In conjunction with this
acquisition, the Company assumed ¥47.8 billion of long-term debt, of which ¥32.5 billion and ¥5.3 billion are scheduled to mature in 2014
and 2026, respectively, and ¥10 billion of debt has no stated maturity date. The carrying value of the debt at December 31, 2011, was $520
million. The Star and Edison Businesses hold $79 million of the Company’s medium-term notes. As a result, the acquisition of the Star and
Edison Businesses by the Company resulted in a $79 million reduction of the Company’s consolidated long-term debt.
Prudential Financial, Inc. 2011 Annual Report 203