This excerpt taken from the NIHD 10-K filed Mar 22, 2006.
Financing and Hedging Activities
Mexico Syndicated Loan Facility. In October 2004, Nextel Mexico closed on a $250.0 million, five year syndicated loan facility. Of the total amount of the facility, $129.0 million is denominated in U.S. dollars with a floating interest rate based on LIBOR (6.81% as of December 31, 2005), $31.0 million is denominated in Mexican pesos with a floating interest rate based on the Mexican reference rate, the Interbank Equilibrium Interest Rate, or TIIE (11.13% as of December 31, 2005), and $90.0 million is denominated in Mexican pesos at an interest rate fixed at the time of funding (12.48%). In April 2005, Nextel Mexico amended the credit
agreement for the syndicated loan facility to extend the availability period until May 31, 2005, and in May 2005, Nextel Mexico drew down on the loan facility for the entire $250.0 million.
Conversion of 3.5% Convertible Notes. On June 10, 2005 and June 21, 2005, certain noteholders converted $40.0 million and $48.5 million, respectively, principal face amount of our 3.5% convertible notes into 3,000,000 shares and 3,635,850 shares (75.0 shares issued per $1,000 of debt principal multiplied by the debt principal) in accordance with the original terms of the debt securities. In connection with these conversions, we paid in the aggregate $8.9 million in cash as additional consideration for conversion, as well as $0.8 million of accrued and unpaid interest. We recorded the $8.9 million that we paid as debt conversion expense in our consolidated statement of operations. We reclassified to paid-in capital the original remaining deferred financing costs related to the notes that were converted.
Interest Rate Swap. In July 2005, Nextel Mexico entered into an interest rate swap agreement to hedge the variability of future cash flows associated with the $31.0 million Mexican peso-denominated variable rate portion of its $250.0 million syndicated loan facility. Under the interest rate swap, Nextel Mexico agreed to exchange the difference between the variable Mexican reference rate, TIIE, and a fixed rate, based on a notional amount of $31.4 million. The interest rate swap fixed the amount of interest expense associated with this portion of the syndicated loan facility commencing on August 31, 2005 and will continue over the life of the facility based on a fixed rate of about 11.95% per year in local Mexican currency.
2.75% Convertible Notes. In August 2005, we privately placed $300.0 million aggregate principal amount of 2.75% convertible notes due 2025, which we refer to as our 2.75% notes. In addition, we granted the initial purchaser an option to purchase up to an additional $50.0 million principal amount of 2.75% notes, which the initial purchaser exercised in full. As a result, we issued an additional $50.0 million aggregate principal amount of 2.75% notes, resulting in total gross proceeds of $350.0 million. We also incurred direct issuance costs of $9.0 million, which we recorded as deferred financing costs on our consolidated balance sheet and are amortizing over five years. The notes were publicly registered, effective February 10, 2006.
The 2.75% notes bear interest at a rate of 2.75% per annum on the principal amount of the notes, payable semi-annually in arrears in cash on February 15 and August 15 of each year, beginning February 15, 2006, and will mature on August 15, 2025, when the entire principal balance of $350.0 million will be due. In addition, the noteholders have the right to require us to repurchase the 2.75% notes on August 15 of 2010, 2012, 2015 and 2020 at a repurchase price equal to 100% of their principal amount, plus any accrued and unpaid interest (including additional amounts, if any) up to, but excluding, the repurchase date. The 2.75% notes are convertible into 6,988,450 shares of our common stock at a conversion rate of 19.967 shares per $1,000 principal amount of notes, subject to adjustment, prior to the close of business on the final maturity date under certain circumstances:
We have the option to satisfy the conversion of the 2.75% notes in shares of our common stock, in cash or a combination of both.
Prior to August 20, 2010, the 2.75% notes are not redeemable. On or after August 20, 2010, we may redeem for cash some or all of the 2.75% notes, at any time and from time to time, upon at least 30 days notice for a price equal to 100% of the principal amount of the notes to be redeemed plus any accrued and unpaid interest (including additional amounts, if any) up to, but excluding, the redemption date. See Note 7 to our consolidated financial statements included at the end of this annual report on Form 10-K for additional information regarding our 2.75% notes.
Foreign Currency Hedge. In September 2005, Nextel Mexico entered into a derivative agreement to reduce its foreign currency transaction risk associated with $129.4 million of its 2006 U.S. dollar forecasted capital expenditures and handset purchases. This risk is hedged by forecasting Nextel Mexicos capital expenditures and handset purchases for a 12-month period beginning in January 2006. Under this agreement, Nextel Mexico purchased a U.S. dollar call option for $3.6 million and sold a call option on the Mexican peso for $1.1 million for a net cost of $2.5 million.
In October 2005, Nextel Mexico entered into another derivative agreement to further reduce its foreign currency transaction risk associated with $52.0 million of its 2006 U.S. dollar forecasted capital expenditures
and handset purchases. This risk is similarly hedged by forecasting Nextel Mexicos capital expenditures and handset purchases for a 12-month period beginning in January 2006. Under this agreement, Nextel Mexico purchased a U.S. dollar call option for $1.4 million and sold a call option on the Mexican peso for $0.3 million for a net cost of $1.1 million.