Prudential 2012 Annual Report Download - page 162

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
14. SHORT-TERM AND LONG-TERM DEBT (continued)
Funding Agreement Notes Issuance Program. The Company maintains a Funding Agreement Notes Issuance Program in which a
statutory trust issues medium-term notes secured by funding agreements issued to the Trust by Prudential Insurance. These obligations are
included in “Policyholders’ account balances” and not included in the foregoing table. See Notes 5 and 10 for further discussion of these
obligations.
Junior Subordinated Notes
Prudential Financial’s junior subordinated notes outstanding are considered hybrid securities that receive enhanced equity treatment
from the rating agencies. Junior subordinated notes outstanding, along with their key terms, are as follows:
Issue Date
Principal
Amount
Initial
Interest
Rate
Investor
Type
Optional
Redemption
Date(1)
Interest Rate
Subsequent to Optional
Redemption Date
Scheduled
Maturity Date
Final
Maturity Date
(in millions)
June 2008 .......................... $ 600 8.875% Institutional 6/15/18 LIBOR + 5.00% 6/15/38 6/15/68
July 2008 ........................... $ 920 9.000% Retail 6/15/13 9.000% 6/15/38 6/15/68
August 2012 ........................ $1,000 5.875% Institutional 9/15/22 LIBOR + 4.175% n/a 9/15/42
November 2012...................... $1,500 5.625% Institutional 6/15/23 LIBOR + 3.920% n/a 6/15/43
December 2012 ...................... $ 575 5.750% Retail 12/4/17 5.750% n/a 12/15/52
(1) Represents the initial date on which the notes can be redeemed at par solely at the option of the Company, subject in the case of the 8.875% notes to
compliance with the replacement capital covenant described below.
Prudential Financial has the right to defer interest payments on these notes for specified periods, typically 5-10 years without resulting
in a default, during which time interest will be compounded. On or after the optional redemption dates, Prudential Financial may redeem
the notes at par plus accrued and unpaid interest. Prior to those optional redemption dates, redemptions generally are subject to a make-
whole price; however, the Company may redeem the notes prior to these dates at par upon the occurrence of certain events, such as, for the
notes issued in 2012, a future change in the regulatory capital treatment of the notes with respect to the Company.
In April 2012, the Company terminated the replacement capital covenants that were entered into in connection with the junior
subordinated notes issued in 2008. In April, the Company also entered into a new replacement capital covenant with respect to the 8.875%
junior subordinated notes only. This new replacement capital covenant was entered into for the benefit of the holders of the Company’s
5.90% medium-term notes due March 2036 and requires that the Company not repay, redeem or purchase the 8.875% junior subordinated
notes prior to June 15, 2038 unless the Company has received proceeds from the sale or issuance of common stock or other qualifying
securities that have certain characteristics that are at least as equity-like as the 8.875% junior subordinated notes. However, unlike the prior
covenants that the Company terminated, the terms of this new replacement capital covenant do not apply in certain instances, including
(i) if Standard & Poor’s upgrades the Company’s corporate credit rating by at least one notch above “A+” or (ii) if the Company
repurchases or redeems up to 10% of the outstanding principal amount of the 8.875% junior subordinated notes in any one-year period,
provided that no more than 25% of the outstanding principal amount of the 8.875% junior subordinated notes are repurchased or redeemed
in any ten-year period.
Prudential Holdings, LLC Notes
On December 18, 2001, the date of demutualization, Prudential Holdings, LLC (“PHLLC”), a wholly-owned subsidiary of Prudential
Financial, issued $1,750 million in senior secured notes (the “IHC debt”). PHLLC owns the capital stock of Prudential Insurance and does
not have any operating businesses of its own. The IHC debt represents senior secured obligations of PHLLC with limited recourse; neither
Prudential Financial, Prudential Insurance nor any other affiliate is an obligor or guarantor on the IHC debt. The IHC debt is collateralized
by 13.8% of the outstanding common stock of Prudential Insurance and other items specified in the indenture, primarily the “Debt Service
Coverage Account” (the “DSCA”) discussed below.
PHLLC’s ability to meet its obligations under the IHC debt is dependent principally upon sufficient available funds being generated
by the Closed Block Business and the ability of Prudential Insurance, the sole direct subsidiary of PHLLC, to dividend such funds to
PHLLC. The payment of scheduled principal and interest on the Series A notes and the Series B notes is insured by a financial guarantee
insurance policy. The payment of principal and interest on the Series C notes is not insured. The IHC debt is redeemable prior to its stated
maturity at the option of PHLLC and, in the event of certain circumstances, the bond insurer can require PHLLC to redeem the IHC debt.
Net proceeds from the IHC debt amounted to $1,727 million, of which, $1,218 million was distributed to Prudential Financial through
a dividend on the date of demutualization for use in the Financial Services Businesses. In addition, $72 million was used to purchase a
guaranteed investment contract to fund a portion of the financial guarantee insurance premium related to the IHC debt. The remainder of
the net proceeds was deposited to a restricted account within PHLLC, referred to as the DSCA, and constitutes collateral for the IHC debt.
The balance in the DSCA was $658 million as of December 31, 2012.
Summarized consolidated financial data for Prudential Holdings, LLC is presented below.
160 Prudential Financial, Inc. 2012 Annual Report