International Paper 2015 Annual Report Download - page 82

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credit and therefore was not the primary beneficiary at
December 31, 2014. The Company’s maximum
exposure to loss at December 31, 2014 equaled the
principal amount of the Timber Notes; however, an
analysis performed by the Company concluded the
likelihood of this exposure was remote.
During the third quarter of 2015, we initiated a series of
actions in order to extend the 2006 monetization
structure and maintain the long-term nature of the $1.4
billion deferred tax liability. First, International Paper
acquired the Class A interests in the Investor Entities
from a third party for $198 million in cash. As a result,
International Paper became the owner of all of the Class
A and Class B interests in the Entities and became the
primary beneficiary of the Entities. The assets and
liabilities of the Entities, primarily consisting of the
Timber Notes and third party bank loans, were recorded
at fair value as of the acquisition date of the Class A
interests.
Subsequent to purchasing the Class A interests in the
Investor Entities, International Paper restructured the
Entities, which resulted in the formation of wholly-
owned, bankruptcy-remote special purpose entities
(the 2015 Financing Entities). As part of the
restructuring, the Timber Notes held by the Borrower
Entities, subject to the third party bank loans, were
contributed to the 2015 Financing Entities along with
approximately $150 million in International Paper debt
obligations, approximately $600 million in cash and
approximately $130 million in demand loans from
International Paper, and certain Entities were
liquidated. As a result of these transactions,
International Paper began consolidating the 2015
Financing Entities during the third quarter of 2015. Also,
during the third quarter of 2015, the 2015 Financing
Entities used $630 million in cash to pay down a portion
of the third party bank loans and refinanced
approximately $4.2 billion of those loans on
nonrecourse terms (the 2015 Refinance Loans).
During the fourth quarter of 2015, International Paper
extended the maturity date on the Timber Notes for an
additional five years. The Timber Notes are shown in
Financial assets of special purpose entities on the
accompanying consolidated balance sheet and mature
in August 2021 unless extended for an additional five
years. These notes are supported by approximately
$4.8 billion of irrevocable letters of credit. In addition,
the Company extinguished the 2015 Refinance Loans
scheduled to mature in May 2016 and entered into new
nonrecourse third party bank loans totaling
approximately $4.2 billion (the Extension Loans).
Provisions of loan agreements related to approximately
$1.1 billion of the Extension Loans require the bank
issuing letters of credit supporting the Timber Notes
pledged as collateral to maintain a credit rating at or
above a specified threshold. In the event the credit
rating of the letter of credit bank is downgraded below
the specified threshold, the letters of credit must be
replaced within 60 days with letters of credit from a
qualifying financial institution. The Extension Loans are
shown in Nonrecourse financial liabilities of special
purpose entities on the accompanying consolidated
balance sheet and mature in the fourth quarter of 2020.
The extinguishment of the 2015 Refinance Loans of
approximately $4.2 billion and the issuance of the
Extension Loans of approximately $4.2 billion are
shown as part of reductions of debt and issuances of
debt, respectively, in the financing activities of the
consolidated statement of cash flows.
The Extension Loans are nonrecourse to the Company,
and are secured by approximately $4.8 billion of Timber
Notes, the irrevocable letters of credit supporting the
Timber Notes and approximately $150 million of
International Paper debt obligations. The $150 million
of International Paper debt obligations are eliminated
in the consolidation of the 2015 Financing Entities and
are not reflected in the Company’s consolidated
balance sheet.
The purchase of the Class A interests and subsequent
restructuring described above facilitated the
refinancing and extensions of the third party bank loans
on nonrecourse terms. The transactions described in
these paragraphs result in continued long-term
classification of the $1.4 billion deferred tax liability
recognized in connection with the 2006 forestlands
sale.
As of December 31, 2015, the fair value of the Timber
Notes and Extension Loans is $4.68 billion and $4.28
billion, respectively. The Timber Notes and Extension
Loans are classified as Level 2 within the fair value
hierarchy, which is further defined in Note 14.
Activity between the Company and the 2015 Financing
Entities (the Entities prior to the purchase of the Class
A interest discussed above) was as follows:
In millions 2015 2014 2013
Revenue (a) $43$38$45
Expense (a) 81 72 79
Cash receipts (b) 21 22 33
Cash payments (c) 71 73 84
(a) The net expense related to the Company’s interest in the
Entities is included in the accompanying consolidated
statement of operations, as International Paper has and
intends to effect its legal right to offset as discussed above.
After formation of the 2015 Financing Entities, the revenue
and expense are included in Interest expense, net in the
accompanying consolidated statement of operations.
(b) The cash receipts are equity distributions from the Entities to
International Paper prior to the formation of the 2015 Financing
Entities. After formation of the 2015 Financing Entities, cash
receipts are interest received on the Financial assets of special
purpose entities.