International Paper 2012 Annual Report Download - page 96

The Company is currently being challenged by Brazil-
ian tax authorities concerning the statute of limi-
tations related to the use of certain tax credits. The
Company is appealing an unfavorable March 2012
administrative court ruling. The potential loss to the
Company in the event of a final unfavorable outcome
is approximately $31 million.
The Company is involved in various other inquiries,
administrative proceedings and litigation relating to
environmental and safety matters, contracts, sales of
property, intellectual property, personal injury, labor
and employment and other matters, some of which
allege substantial monetary damages. While any
proceeding or litigation has the element of
uncertainty, the Company believes that the outcome
of any of the lawsuits or claims that are pending or
threatened or all of them combined (other than those
that cannot be assessed due to their preliminary
nature) will not have a material effect on its con-
solidated financial statements.
NOTE 11 VARIABLE INTEREST ENTITIES AND
PREFERRED SECURITIES OF SUBSIDIARIES
VARIABLE INTEREST ENTITIES
In connection with the 2006 sale of approximately
5.6 million acres of forestlands, International Paper
received installment notes (the Timber Notes) total-
ing approximately $4.8 billion. The Timber Notes,
which do not require principal payments prior to
their August 2016 maturity, are supported by irrev-
ocable letters of credit obtained by the buyers of the
forestlands.
During 2006, International Paper contributed the
Timber Notes to newly formed entities (the Borrower
Entities) in exchange for Class A and Class B inter-
ests in these entities. Subsequently, International
Paper contributed its $200 million Class A interests in
the Borrower Entities, along with approximately $400
million of International Paper promissory notes, to
other newly formed entities (the Investor Entities,
and together with the Borrower Entities, the Entities)
in exchange for Class A and Class B interests in these
entities, and simultaneously sold its Class A interest
in the Investor Entities to a third party investor. As a
result, at December 31, 2006, International Paper
held Class B interests in the Borrower Entities and
Class B interests in the Investor Entities valued at
approximately $5.0 billion. International Paper did
not provide any financial support that was not pre-
viously contractually required for the years ended
December 31, 2012, 2011 or 2010.
Following the 2006 sale of forestlands and creation
of the Entities discussed above, the Timber Notes
were used as collateral for borrowings from third
party lenders, which effectively monetized the Tim-
ber Notes.
Provisions of certain loan agreements require any
bank issuing letters of credit supporting the Timber
Notes to maintain a credit rating above a specified
threshold. In the event the credit rating of a letter of
credit bank is downgraded below the specified
threshold, the letters of credit must be replaced
within 60 days by letters of credit from a qualifying
institution, or for one letter of credit bank, collateral
must be posted. The Company, retained to provide
management services for the third-party entities that
hold the Timber Notes, has, as required by the loan
agreements, successfully replaced banks that fell
below the specified threshold or obtained a waiver
as further discussed below.
Also during 2006, the Entities acquired approx-
imately $4.8 billion of International Paper debt
obligations for cash, resulting in a total of approx-
imately $5.2 billion of International Paper debt
obligations held by the Entities at December 31,
2006. The various agreements entered into in con-
nection with these transactions provide that Interna-
tional Paper has, and intends to effect, a legal right to
offset its obligation under these debt instruments
with its investments in the Entities. Accordingly, for
financial reporting purposes, International Paper has
offset approximately $5.2 billion of Class B interests
in the Entities against $5.3 billion and $5.2 billion of
International Paper debt obligations held by these
Entities at December 31, 2012 and 2011, respectively.
Despite the offset treatment, these remain debt obli-
gations of International Paper. Remaining borrow-
ings of $79 million and $92 million at December 31,
2012 and 2011, respectively, are included in floating
rate notes due 2012 – 2017 in the summary of long-
term debt in Note 12. Additional debt related to the
above transaction of $79 million and $38 million is
included in short-term notes in the summary of long-
term debt in Note 12 at December 31, 2012 and 2011,
respectively.
On February 5, 2010, Moody’s Investor Services
reduced its credit rating of senior unsecured long-
term debt of the Royal Bank of Scotland N.V.
(formerly ABN AMRO Bank N.V.), which issued let-
ters of credit that support $1.4 billion of the Timber
Notes, below the specified threshold. The letters of
credit were successfully replaced by another qualify-
ing institution.
On October 7, 2011, Moody’s Investor Services
reduced its credit rating of senior unsecured long-
term debt of the Royal Bank of Scotland Group Plc,
which issued letters of credit that support $1.6 billion
of the Timber Notes, below the specified threshold.
Letters of credit worth $842 million were successfully
replaced by other qualifying institutions. Fees of $5
million were incurred in connection with this
replacement. The Company and third-party manag-
ing member instituted a replacement waiver for the
remaining $797 million. On July 25, 2012, these let-
ters of credit were successfully replaced by another
qualifying institution.
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