Prudential 2001 Annual Report Download - page 128

Prudential Financial, Inc.
Notes to Consolidated Financial Statements
11. Short-term and Long-term Debt (continued)
Prudential Holdings, LLC Notes
On the date of demutualization, Prudential Holdings, LLC (“PHLLC”), a wholly owned subsidiary of Prudential
Financial, issued $1.75 billion 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 of PHLLC is an obligor or guarantor on the IHC debt. The IHC debt is collateralized by 14% of the
outstanding common stock of Prudential Insurance and other items specified in the indenture, primarily the “debt
coverage service account” 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 IHC debt bond insurer can require PHLLC to redeem the IHC debt.
Net proceeds from the IHC debt amounted to $1,727 million. The majority of the net proceeds, or $1,218 million,
was distributed to Prudential Financial through a dividend on the date of demutualization for use in the Financial
Services Businesses. Net proceeds of $437 million were deposited to a restricted account within PHLLC. This
restricted account, referred to as the “debt service coverage account,” constitutes additional collateral for the IHC
debt and is maintained in the Financial Services Businesses. The remainder of the net proceeds, or $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.
Summarized consolidated financial data for Prudential Holdings, LLC is presented below. Amounts include results
of operations and cash flows of Prudential Insurance prior to the date of demutualization.
(In Millions)
Consolidated Statement of Financial Position data at December 31, 2001:
Total assets .......................................................................................... $220,585
Total liabilities ....................................................................................... $205,994
Total equity .......................................................................................... $ 14,591
Total liabilities and equity .............................................................................. $220,585
Consolidated Statement of Operations data for the year ended December 31, 2001:
Total revenues ........................................................................................ $ 27,168
Total benefits and expenses ............................................................................. $ 27,395
Loss from continuing operations ......................................................................... $ (227)
Net loss ............................................................................................. $ (151)
Consolidated Statement of Cash Flows data for the year ended December 31, 2001:
Cash flows used in operating activities .................................................................... $ 5,240
Cash flows from investing activities ....................................................................... $ 7,401
Cash flows used in financing activities .................................................................... $(13,730)
Net decrease in cash and cash equivalents .................................................................. $ (1,089)
Prudential Financial is a holding company and is a legal entity separate and distinct from its subsidiaries. The rights
of Prudential Financial to participate in any distribution of assets of any subsidiary, including upon its liquidation or
reorganization, are subject to the prior claims of creditors of that subsidiary, except to the extent that Prudential
Financial may itself be a creditor of that subsidiary and its claims are recognized. PHLLC and its subsidiaries have
entered into covenants and arrangements in connection with the issuance of the IHC debt which are intended to
confirm their separate, “bankruptcy-remote” status, by assuring that the assets of PHLLC and its subsidiaries are not
available to creditors of Prudential Financial or its other subsidiaries, except and to the extent that Prudential
Financial and its other subsidiaries are, as shareholders or creditors of PHLLC and its subsidiaries, entitled to those
assets.
At December 31, 2001, the Company was in compliance with all IHC debt covenants.
Growing and Protecting Your Wealth126