Western Union 2007 Annual Report Download - page 37

Management’s Discussion and Analysis of Financial Condition and Results of Operations
35
Notes
On September 29, 2006, we issued $1.0 billion aggregate prin-
cipal amount of unsecured notes maturing on October 1, 2016
(the “2016 Notes”). Interest on the 2016 Notes is payable semian-
nually on April 1 and October 1 each year. We may redeem the
2016 Notes at any time prior to maturity at the applicable treasury
rate plus 20 basis points.
On November 17, 2006, we issued $2 billion aggregate
principal amount of unsecured fi xed and fl oating rate notes,
comprised of $500 million aggregate principal amount of our
Floating Rate Notes due 2008 (the “Floating Rate Notes”), $1
billion aggregate principal amount notes due 2011 (the “2011
Notes”) and $500 million aggregate principal amount of notes
due 2036 (the “2036 Notes”).
In June 2007, we entered into an interest rate swap with a
notional amount of $75.0 million to effectively change the
characteristic of our interest rate payments on a portion of our
2011 Notes from fi xed-rate payments to short-term LIBOR-based
variable rate payments in order to manage the mix of fi xed and
fl oating rates in our debt portfolio. The rate on the fl oating
portion of the swap resets every three months based on the
three month LIBOR.
Interest with respect to the 2011 Notes and 2036 Notes is
payable semiannually in arrears on May 17 and November 17
each year. Interest with respect to the Floating Rate Notes is
payable quarterly in arrears on February 17, May 17, August 17,
and November 17 each year at a per annum rate equal to the three
month LIBOR plus 15 basis points, reset quarterly (5.06% and 5.52%
at December 31, 2007 and 2006, respectively). We may redeem
the 2011 Notes and the 2036 Notes at any time prior to maturity
at the applicable treasury rate plus 15 basis points and 25 basis
points, respectively. We may redeem the Floating Rate Notes at
any time on or after May 17, 2007, at a redemption price equal
to 100% of the principal amount of the Floating Rate Notes to be
redeemed plus accrued interest on the date of redemption.
Debt Service Requirements
Our 2008 debt service requirements will include payments on
existing borrowings and any future borrowings under our com-
mercial paper program, the payment due on the maturity of our
$500 million Floating Rate Notes in 2008 and interest payments.
We have the ability to use existing fi nancing sources, such as our
Revolving Credit Facility and commercial paper program, to meet
debt obligations as they arise. Currently we intend to refi nance
our Floating Rate Notes in 2008 with new fi nancing sources,
depending on market conditions. Additionally, we may convert
a portion of our commercial paper program into longer term
borrowings in 2008. Based on market conditions at the time such
re-fi nancings occur, we may not be able to obtain new fi nancings
under similar conditions as historically reported.
As discussed in “Cash and Investment Securities” above, a
signifi cant portion of our cash and cash equivalents on hand at
December 31, 2007 is held by foreign entities, some of which
has been taxed at relatively low foreign tax rates compared to
our combined federal and state tax rate in the United States. We
currently plan to invest such funds through these foreign entities.
However, if we change our plans or are required to change our
plans in order to use these cash and cash equivalents for debt
service, we would incur signifi cant tax obligations.
Credit Ratings and Debt Covenants
The credit ratings on our debt are an important consideration in
managing our fi nancing costs and facilitating access to additional
capital on favorable terms. Factors that we believe are important
in assessing our credit ratings include earnings, cash fl ow genera-
tion, leverage, available liquidity and overall business risks.
Our Revolving Credit Facility contains a facility fee and a
utilization fee, determined based on our credit rating assigned
by S&P and/or Moody’s, as further described above. We do not
have any other terms within our debt agreements or other con-
tracts that are tied to changes in our credit ratings. The table
below summarizes our credit ratings as of December 31, 2007:
December 31, 2007 S&P Moody’s Fitch
Short-term rating A-2 P-2 F2
Senior unsecured A- A3 A-
Ratings outlook Stable Stable Stable
These ratings are not a recommendation to buy, sell or hold any
of our securities. Our credit ratings may be subject to revision or
withdrawal at any time by the assigning rating organization, and
each rating should be evaluated independently of any other
rating. We cannot ensure that a rating will remain in effect for any
given period of time or that a rating will not be lowered or with-
drawn entirely by a rating agency if, in its judgment, circumstances
so warrant. A signifi cant downgrade or an indication that a sig-
nifi cant downgrade may occur could result in the following:
|| Our access to the commercial paper market may be limited,
and if we were downgraded below investment grade, our
access to the commercial paper market would likely be
eliminated;
||
Our borrowing costs on certain existing borrowings would
increase;
||
We may be required to pay a higher interest rate in future
fi nancings;
|| Our potential pool of investors and funding sources may
decrease;
|| Regulators may impose additional capital and other require-
ments on us, including imposing restrictions on the ability of
our regulated subsidiaries to pay dividends; and
|| Our agent relationships may be adversely impacted, particularly
those agents that are fi nancial institutions or post offi ces.
The indenture governing our notes and the Revolving Credit
Facility all contain covenants which, among other things, limit
or restrict our ability to grant certain types of security interests,
enter into sale and leaseback transactions or incur certain sub-
sidiary level indebtedness. In addition, the Revolving Credit
Facility requires us to maintain a consolidated interest coverage
ratio of greater than 2:1 (ratio of consolidated EBITDA, as defi ned
in the agreement, to interest expense) for each period compris-
ing the four most recent consecutive fi scal quarters. Our con-
solidated interest coverage ratio was 8:1 as of December 31,
2007. As of December 31, 2007, we are in compliance with our