This excerpt taken from the BAX 10-K filed Feb 28, 2007.
Credit Facilities, Access to Capital, Credit Ratings and Net Investment Hedges
The company had $2.5 billion of cash and equivalents at December 31, 2006. The company has two primary revolving credit facilities, which totaled approximately $2.2 billion at December 31, 2006. In December 2006, the company replaced its existing $640 million and $800 million revolving credit facilities with a $1.5 billion five-year revolving credit facility. The second facility, which is denominated in Euros, totals approximately $660 million and matures in January 2008. These facilities enable the company to borrow funds in U.S. Dollars, Euros, Japanese Yen or Swiss Francs on an unsecured basis at variable interest rates and contain various covenants, including a maximum net-debt-to-capital ratio and, solely with respect to the Euro-denominated facility, a minimum interest coverage ratio. At December 31, 2006, the company was in compliance with the financial covenants in these agreements. Borrowings outstanding under these facilities totaled $139 million at December 31, 2006. There were no other borrowings outstanding under the companys primary credit facilities at December 31, 2006. The company also maintains certain other credit arrangements, as described in Note 5.
The companys net-debt-to-capital ratio was 4.8% and 36.7% at December 31, 2006 and 2005, respectively. The net-debt-to-capital ratio, which is not a measure defined by GAAP, is calculated as net debt (short-term and long-term debt and capital lease obligations, less cash and cash equivalents) divided by capital (the total of net debt and shareholders equity). The significant decline in the net-debt-to-capital ratio from 2005 to 2006 was primarily due to the settlement of the purchase contracts component of the equity units in February 2006. As further discussed in Note 5, a portion of the $1.25 billion cash proceeds from the settlement of the purchase contracts (and issuance of common stock) was used to pay down maturing debt in 2006.
Access to Capital
The company intends to fund short-term and long-term obligations as they mature through cash on hand, future cash flows from operations, or by issuing additional debt or common stock. The companys ability to generate cash flows from operations, issue debt, enter into other financing arrangements and attract long-term capital on acceptable terms could be adversely affected if there is a material decline in the demand for the companys products, deterioration in the companys key financial ratios or credit ratings, or other significantly unfavorable changes in conditions. The company believes it has sufficient financial flexibility in the future to issue debt, enter into other financing arrangements, and attract long-term capital on acceptable terms to support the companys growth objectives.
The companys credit ratings at December 31, 2006 were as follows.
Certain of the companys credit ratings and outlooks were upgraded during 2006. The companys credit ratings on senior debt were raised from A- to A by Standard & Poors and BBB+ to A- by Fitch, and the ratings on short-term debt were raised from A2 to A1 by Standard & Poors. In addition, Standard & Poors favorably changed its outlook on Baxter from Stable to Positive during 2006.
If Baxters credit ratings or outlooks were to be downgraded, the companys financing costs related to its credit arrangements and any future debt issuances could be unfavorably impacted. However, any future credit rating downgrade or change in outlook would not affect the companys ability to draw on its credit facilities, and would not result in an acceleration of the scheduled maturities of any of the companys outstanding debt. One of the companys foreign currency and interest rate derivative agreements includes a provision whereby the counterparty financial institution could cause the arrangement to be terminated if Baxters credit rating on its senior unsecured debt declined to BBB- or Baa3 (i.e., a two-rating or four-rating downgrade, depending upon the rating agency). As of December 31, 2006, the mark-to-market liability balance of outstanding cross-currency swaps subject to this agreement totaled approximately $400 million. In addition, if Baxters credit ratings on senior unsecured debt declined to BBB- or Baa3, the company would no longer be able to securitize new receivables under one of its foreign securitization arrangements. This arrangement also requires that the company post cash collateral in the event of a specified unfavorable change in credit rating. The maximum potential cash collateral, which was not required as of December 31, 2006, was de minimus. However, any downgrade of credit ratings would not impact previously securitized receivables.
MANAGEMENTS DISCUSSION and ANALYSIS
Net Investment Hedges
The company historically hedged the net assets of certain of its foreign operations using a combination of foreign currency denominated debt and cross-currency swaps. The cross-currency swaps have served as effective hedges for accounting purposes and have reduced volatility in the companys shareholders equity balance and net-debt-to-capital ratio.
In 2004, the company reevaluated its net investment hedge strategy and decided to reduce the use of these instruments as a risk management tool. In order to reduce financial risk and uncertainty through the maturity (or cash settlement) dates of the cross-currency swaps, the company executed offsetting, or mirror, cross-currency swaps relating to over half of the existing portfolio. As of the date of execution, these mirror swaps effectively fixed the net amount that the company will ultimately pay to settle the cross-currency swap agreements subject to this strategy. The mirror swaps will be settled when the offsetting existing swaps are settled. Approximately $335 million, or 46%, of the total swaps liability of $736 million as of December 31, 2006 has been fixed by the mirror swaps.
There were no settlements of cross-currency swaps or mirror swaps in 2006. As also discussed above, during 2005 the company settled certain cross-currency swaps agreements (and related mirror swaps, as applicable). In accordance with SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, when the cross-currency swaps are settled, the cash flows are reported within the financing section of the consolidated statement of cash flows. When the mirror swaps are settled, the cash flows are reporting in the operating section of the consolidated statement of cash flows. Of the $379 million of net settlement payments in 2005, $432 million of cash outflows were included in the financing section and $53 million of cash inflows were included in the operating section. The entire $40 million in settlement payments in 2004 were included in the financing section of the statement of cash flows.
Refer to Note 6 for additional discussion of the cross-currency swaps and related mirror swaps, including a summary of the instruments outstanding at December 31, 2006.