Prudential 2007 Annual Report Download - page 144

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
12. SHORT-TERM AND LONG-TERM DEBT (continued)
Long-term Debt
Long-term debt at December 31, is as follows:
Maturity
Dates Rate 2007 2006
(in millions)
Prudential Holdings, LLC notes (the “IHC debt”)
Series A ........................................................... 2017(1) (2) $ 333 $ 333
Series B ........................................................... 2023(1) 7.245% 777 777
Series C ........................................................... 2023(1) 8.695% 640 640
Fixed rate notes:
Fixed rate note subject to set-off arrangements ............................ 2009-2011 4.45%-5.11% — 1,692
Surplus notes ....................................................... 2015-2025 8.10%-8.30% 444 443
Other fixed rate notes ................................................ 2008-2037 3.25%-9.13% 9,753 7,802
Floating rate notes:
Surplus notes ....................................................... 2016-2052 (3) 1,600 600
Other floating rate notes .............................................. 2008-2020 (4) 554 604
Sub-total .............................................................. 14,101 12,891
Less assets under set-off arrangements(5) .................................... — 1,468
Total long-term debt ..................................................... $14,101 $11,423
(1) Annual scheduled repayments of principal for the Series A and Series C notes begin in 2013. Annual scheduled repayments of principal for the Series B
notes begin in 2018.
(2) The interest rate on the Series A notes is a floating rate equal to LIBOR plus 0.875% per year. The interest rate ranged from 5.8% to 6.5% in 2007 and
5.4% to 6.3% in 2006.
(3) The interest rate on the floating rate Surplus notes ranged from 5.4% to 5.9% in 2007 and was 5.6% in 2006.
(4) The interest rates on the other floating rate notes are based on LIBOR and the U.S. Consumer Price Index. Interest rates ranged from 2.7% to 7.5% in
2007 and 2.7% to 6.7% in 2006.
(5) Assets under set-off arrangements represent a reduction in the amount of fixed rate notes included in long-term debt, relating to an arrangement where
valid rights of set-off exist and it is the intent of both parties to settle on a net basis under legally enforceable arrangements.
Several long-term debt agreements have restrictive covenants related to the total amount of debt, net tangible assets and other matters.
At December 31, 2007 and 2006, the Company was in compliance with all debt covenants.
The fixed rate surplus notes issued by Prudential Insurance are subordinated to other Prudential Insurance borrowings and
policyholder obligations, and the payment of interest and principal may only be made with the prior approval of the Commissioner of
Banking and Insurance of the State of New Jersey (the “Commissioner”). The Commissioner could prohibit the payment of the interest and
principal on the surplus notes if certain statutory capital requirements are not met. At December 31, 2007 and 2006, the Company met these
statutory capital requirements. At December 31, 2007 and 2006, $444 million and $693 million, respectively, of fixed rate surplus notes
were outstanding, of which $250 million is reflected as short-term debt at December 31, 2006.
During 2006, a subsidiary of Prudential Insurance entered into a surplus note purchase agreement that provides for the issuance of up
to $3 billion of ten-year floating rate surplus notes. As of December 31, 2007 and 2006, $1,100 million and $600 million, respectively,
were outstanding under this agreement. Concurrent with the issuance of each surplus note, Prudential Financial enters into arrangements
with the buyer, which are accounted for as derivative instruments, that may result in payments by, or to, Prudential Financial over the term
of the surplus notes, to the extent there are significant changes in the value of the surplus notes. Surplus notes issued under this facility are
subordinated to policyholder obligations, and the payment of interest and principal on them may only be made by the issuer with the prior
approval of the Arizona Department of Insurance. The derivative instruments discussed above also provide that in the event approval is not
obtained to make interest or principal payments, the holder of the surplus notes may have the right to sell the surplus notes to Prudential
Financial. As of December 31, 2007 and 2006, these derivative instruments had no material value.
During 2007, a subsidiary of Prudential Insurance issued $500 million of 45-year floating rate surplus notes. Surplus notes issued
under this facility are subordinated to policyholder obligations, and the payment of interest and principal on them may only be made by the
issuer with the prior approval of the Arizona Department of Insurance. Concurrent with the issuance of these surplus notes, Prudential
Financial entered into a credit derivative with an affiliate of one of the purchasers that will require Prudential Financial to make certain
payments in the event of deterioration in the credit quality of the surplus notes. As of December 31, 2007, the credit derivative had no
material value.
In order to modify exposure to interest rate and currency exchange rate movements, the Company utilizes derivative instruments,
primarily interest rate swaps, in conjunction with some of its debt issues. The impact of these derivative instruments are not reflected in the
142 Prudential Financial 2007 Annual Report