International Paper 2015 Annual Report Download - page 25

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credit facilities as of December 31, 2015. The level of
our indebtedness could have important consequences
to our financial condition, operating results and
business, including the following:
• it may limit our ability to obtain additional debt or
equity financing for working capital, capital
expenditures, product development, dividends,
share repurchases, debt service requirements,
acquisitions and general corporate or other
purposes;
• a portion of our cash flows from operations will be
dedicated to payments on indebtedness and will
not be available for other purposes, including
operations, capital expenditures and future
business opportunities;
• the debt service requirements of our indebtedness
could make it more difficult for us to satisfy other
obligations;
• our indebtedness that is subject to variable rates
of interest exposes us to increased debt service
obligations in the event of increased interest rates;
• it may limit our ability to adjust to changing market
conditions and place us at a competitive
disadvantage compared to our competitors that
have less debt; and
• it may increase our vulnerability to a downturn in
general economic conditions or in our business,
and may make us unable to carry out capital
spending that is important to our growth.
In addition, we are subject to agreements that require
meeting and maintaining certain financial ratios and
covenants. A significant or prolonged downturn in
general business and economic conditions may affect
our ability to comply with these covenants or meet those
financial ratios and tests and could require us to take
action to reduce our debt or to act in a manner contrary
to our current business objectives.
CHANGES IN CREDIT RATINGS ISSUED BY
NATIONALLY RECOGNIZED STATISTICAL RATING
ORGANIZATIONS COULD ADVERSELY AFFECT
OUR COST OF FINANCING AND HAVE AN
ADVERSE EFFECT ON THE MARKET PRICE OF
OUR SECURITIES. Maintaining an investment-grade
credit rating is an important element of our financial
strategy, and a downgrade of the Company’s ratings
below investment grade may limit our access to the
capital markets, have an adverse effect on the market
price of our securities, increase our cost of borrowing
and require us to post collateral for derivatives in a net
liability position. The Company’s desire to maintain its
investment grade rating may cause the Company to
take certain actions designed to improve its cash flow,
including sale of assets, suspension or reduction of our
dividend and reductions in capital expenditures and
working capital.
Under the terms of the agreements governing
approximately $2.5 billion of our debt as of
December 31, 2015, the applicable interest rate on
such debt may increase upon each downgrade in our
credit rating. As a result, a downgrade in our credit rating
may lead to an increase in our interest expense. There
can be no assurance that such credit ratings will remain
in effect for any given period of time or that such ratings
will not be lowered, suspended or withdrawn entirely by
the rating agencies, if, in each rating agency’s
judgment, circumstances so warrant. Any such
downgrade of our credit ratings could adversely affect
our cost of borrowing, limit our access to the capital
markets or result in more restrictive covenants in
agreements governing the terms of any future
indebtedness that we may incur.
DOWNGRADES IN THE CREDIT RATINGS OF
BANKS ISSUING CERTAIN LETTERS OF CREDIT
WILL INCREASE OUR COST OF MAINTAINING
CERTAIN INDEBTEDNESS AND MAY RESULT IN
THE ACCELERATION OF DEFERRED TAXES. We
are subject to the risk that a bank with currently issued
irrevocable letters of credit supporting installment notes
delivered to Temple-Inland in connection with Temple-
Inland's 2007 sales of forestlands may be downgraded
below a required rating. Since 2007, certain banks have
fallen below the required ratings threshold and were
successfully replaced, or waivers were obtained
regarding their replacement. As a result of continuing
uncertainty in the banking environment, a number of
the letter-of-credit banks currently in place remain
subject to risk of downgrade and the number of qualified
replacement banks remains limited. The downgrade of
one or more of these banks may subject the Company
to additional costs of securing a replacement letter-of-
credit bank or could result in an acceleration of
payments of up to $840 million in deferred income taxes
if replacement banks cannot be obtained. The deferred
taxes are currently recorded in the Company's
consolidated financial statements. See Note 12,
Variable Interest Entities, on pages 64 through 66, and
Note 10, Income Taxes, on pages 59 through 61, in Item
8. Financial Statements and Supplementary Data for
further information.
OUR PENSION AND HEALTH CARE COSTS ARE
SUBJECT TO NUMEROUS FACTORS WHICH
COULD CAUSE THESE COSTS TO CHANGE. We
have defined benefit pension plans covering
substantially all U.S. salaried employees hired prior to
July 1, 2004 and substantially all hourly and union
employees regardless of hire date. We provide retiree
health care benefits to certain of our U.S. salaried and
certain hourly employees. Our pension costs are
dependent upon numerous factors resulting from actual
plan experience and assumptions of future experience.