Prudential 2006 Annual Report Download - page 144

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
12. 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 13.8% of the outstanding common stock of Prudential Insurance and other items specified in the
indenture, primarily the “Debt Service Coverage Account” (the “DSCA”) 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
DSCA, constitutes additional collateral for the IHC debt. 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.
2006 2005
(in millions)
Consolidated Statements of Financial Position data at December 31:
Total assets ..................................................................... $345,926 $317,859
Total liabilities ................................................................... 330,138 301,059
Total equity ..................................................................... 15,788 16,800
Total liabilities and equity .......................................................... 345,926 317,859
2006 2005 2004
(in millions)
Consolidated Statements of Operations data for the years ended December 31:
Total revenues ................................................................... $ 20,957 $ 20,189 $18,920
Total benefits and expenses ......................................................... 18,768 17,816 16,339
Income from continuing operations before income taxes and cumulative effect of accounting
change ....................................................................... 2,189 2,373 2,581
Net income ..................................................................... 1,729 2,240 1,800
Consolidated Statements of Cash Flows data for the years ended December 31:
Cash flows from operating activities .................................................. $ 5,817 $ 2,480 $ 2,380
Cash flows used in investing activities ................................................ (7,208) (8,396) (4,881)
Cash flows from financing activities .................................................. 1,613 6,228 2,179
Effect of foreign exchange rate changes on cash balances ................................. (10) (16) (32)
Net increase (decrease) in cash and cash equivalents ..................................... 212 296 (354)
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 with third
parties 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, or would be, entitled to those assets.
At December 31, 2006, the Company was in compliance with all IHC debt covenants.
PRUDENTIAL FINANCIAL, INC. 2006 ANNUAL REPORT
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