Debt

Debt consisted of the following as of June 29, 2018 and June 30, 2017:



	June 29, 2018			June 30, 2017
	(in millions)
0.50% convertible senior notes due 2020	$	35		$	35
Revolving credit facility maturing 2023	500			—
Variable interest rate Term Loan A maturing 2021	—			4,125
Variable interest rate Term Loan A-1 maturing 2023	4,991			—
Variable interest rate U.S. Term Loan B-2 maturing 2023	—			2,970
Variable interest rate U.S. Term Loan B-4 maturing 2023	2,449			—
Variable interest rate Euro Term Loan B-2 maturing 2023⁽¹⁾	—			1,001
7.375% senior secured notes due 2023	—			1,875
1.50% convertible notes due 2024	1,100			—
10.50% senior unsecured notes due 2024	—			3,350
4.750% senior unsecured notes due 2026	2,300			—
Total debt	11,375			13,356
Issuance costs and debt discounts	(203		)	(205		)
Subtotal	11,172			13,151
Less current portion of long-term debt	(179		)	(233		)
Long-term debt	$	10,993		$	12,918


⁽¹⁾	Euro Term Loan B-2 outstanding principal amount as of June 30, 2017 was based upon the Euro to U.S. dollar exchange rate as of that date.

In February 2018, the Company entered into an amendment to the credit agreement entered into on April 29, 2016 (as amended, the “Credit Agreement”), to provide for, among other things, (i) the issuance of a new $5.02 billion of term loan A-1 due 2023 (the “Term Loan A-1”), (ii) a new $2.25 billion revolving credit facility maturing in 2023 (the “Revolving Facility”), which replaced the Company’s prior $1.50 billion revolving credit facility maturing in 2021, (iii) modifications to the restrictive and financial maintenance covenants, to provide more flexibility and increased incremental debt capacity, (iv) amendments of the applicable varying interest rate margins to be based on the Company’s corporate credit ratings as described in the indenture, and (v) upon the occurrence of certain circumstances, a release of the security and guarantees as well as further covenant flexibility and increased incremental debt capacity. The Company used a portion of the proceeds of the Term Loan A-1 to repay in full its previous variable interest rate Term Loan A in the principal amount of $4.02 billion.

The Term Loan A-1 bears interest at a per annum rate equal to, at the Company’s option, either an adjusted London Interbank Offered Rate (“LIBOR”) rate, subject to a 0.00% floor, plus an applicable margin varying from 1.125% to 2.000% or a base rate plus an applicable margin varying from 0.125% to 1.000%, in each case depending on the Company’s corporate credit ratings. Currently the Company has selected the LIBOR rate option, and the applicable rate was 3.59% as of June 29, 2018. Principal payments are due in quarterly installments of (i) 0.625% per quarter from June 2018 through March 2019 and (ii) 1.25% per quarter from June 2019 through December 2022, with the remaining balance payable on February 27, 2023. The Term Loan A-1 issuance costs are amortized to interest expense over the term of the loan, and as of June 29, 2018, issuance costs of $8 million remained unamortized.

In May 2017, the Company entered into an interest rate swap for $1.00 billion notional amount which it has designated as a cash flow hedge to mitigate variations in interest payments under a portion of its LIBOR-based term loans due to variations in the LIBOR index. Under the agreement, the Company pays interest monthly at a fixed rate of 1.66% and receives a LIBOR rate on the notional amount of the contract through May 2020. In addition, in April 2018, the Company entered into an interest rate swap for $1.00 billion notional amount which it has designated as a cash flow hedge to mitigate variations in interest payments under a portion of its LIBOR-based term loans due to variations in the LIBOR index. Under the agreement, the Company pays interest monthly at a fixed rate of 2.75% and receives a LIBOR rate on the notional amount of the contract through February 2023.

Proceeds of $500 million were drawn under the Revolving Facility and were used to fund a voluntary partial prepayment of the Company’s existing U.S. Dollar denominated term B-3 loans (“U.S. Term Loan B-3”). Loans under the Revolving Facility bear interest, at the Company’s option, at either LIBOR plus an applicable margin varying from 1.125% to 2.000% or a base rate plus an applicable margin varying from 0.125% to 1.000%, in each case depending on the Company’s corporate credit ratings. Currently the Company has selected the LIBOR rate option, and the applicable interest rate was 3.59% as of June 29, 2018. The Company will also pay an unused commitment fee on the Revolving Facility ranging from 0.120% to 0.350% based on the Company’s corporate credit ratings as described in the indenture, with an initial fee of 0.250%. As of June 29, 2018, the Company had $1.75 billion of additional borrowing availability under the Revolving Facility.

In November 2017, the Company borrowed $2.96 billion under U.S. Term Loan B-3 under its Credit Agreement and used the proceeds of this new loan to prepay in full the U.S. Term Loan B-2 previously outstanding under the Credit Agreement. During the year ended June 29, 2018, the Company funded a voluntary partial prepayment of $500 million, using proceeds from the Revolving Facility. In May 2018, the Company borrowed $2.46 billion under U.S. Term Loan B-4 under its Credit Agreement and used the proceeds of this new loan to prepay in full the U.S. Term Loan B-3 previously outstanding under the Credit Agreement. The U.S. Term Loan B-4 has an interest rate equal to, at the Company’s option, either an adjusted LIBOR rate, subject to a 0.00% floor, plus 1.75% or a base rate plus 0.75%. Currently the Company has selected the LIBOR rate option, and the applicable interest rate was 3.84% as of June 29, 2018. Principal payments on U.S. Term Loan B-4 of 0.25% are due quarterly and began on June 29, 2018 with the balance due on April 29, 2023. The U.S. Term Loan B-4 issuance costs are amortized to interest expense over the term of the loan and as of June 29, 2018, issuance costs of $1 million remained unamortized.

The Revolving Facility, Term Loan A-1 and Term Loan B-4 are unconditionally guaranteed by each of the guarantors under the Credit Agreement and are secured on a first-priority basis (subject to permitted liens) by a lien on the same collateral that secure the other loans under the Credit Agreement; provided that the security and guarantees will be automatically suspended upon certain conditions.

The Company assumed the 0.5% convertible senior notes due November 15, 2020 (the “2020 Convertible Notes”) in connection with its acquisition of SanDisk Corporation (“SanDisk”), pursuant to an Agreement and Plan of Merger (the “Merger”), on May 12, 2016 (the “SanDisk Closing Date”). As of June 29, 2018, $35 million principal amount of the 2020 Convertible Notes was outstanding and had a conversion rate of 10.9006 units of reference property per $1,000 principal amount of the 2020 Convertible Notes, corresponding to 2.6020 shares of the Company’s common stock and $735.79 of cash, subject to adjustments under the indenture. The 2020 Convertible Notes are not currently exchangeable into reference property.

The 2020 Convertible Notes were bifurcated into a debt host and exchange option for accounting purposes. The exchange options are accounted for as a derivative liability because they are predominantly settled in cash. Changes in the fair value of the exchange options are reported, and will be reported until the Company extinguishes the related debt, in Other expense, net in the Consolidated Statements of Operations. The exchange options are measured and reported at fair value on a recurring basis, within Level 3 of the fair value hierarchy. The fair value of the unredeemed and unsettled exchange options is reported in Accrued expenses and Other liabilities in the Consolidated Balance Sheets. See Note 4, Fair Value Measurements and Investments, for additional disclosures related to the fair values of the exchange options. For 2018, the change in the fair value of the outstanding exchange options related to the 2020 Notes resulted in an immaterial loss.

In February 2018, the Company issued $1.10 billion aggregate principal amount of convertible senior notes due February 1, 2024 (the “2024 Convertible Notes”). The 2024 Convertible Notes bear interest at an annual rate of 1.50% with interest payable on February 1 and August 1 of each year. The Company is not required to make principal payments on the 2024 Convertible Notes prior to the maturity date. The 2024 Convertible Notes are jointly and severally guaranteed by certain material domestic subsidiaries of the Company.

The 2024 Convertible Notes are convertible into cash, shares of the Company’s common stock, or a combination thereof at an initial conversion price of approximately $121.91 per share of common stock. Holders of the 2024 Convertible Notes may freely convert their 2024 Convertible Notes on or after November 1, 2023 until the close of business on the business day immediately preceding the maturity date. Prior to November 1, 2023, holders may convert their 2024 Convertible Notes based on variations in market price of the Company’s common stock in relation to the conversion price or the trading price of the 2024 Convertible Notes or upon the occurrence of specified corporate events. On or after February 5, 2021, the Company may redeem all or part of the 2024 Convertible Notes, at its option, if the market price of the Company’s stock achieves certain levels.

The Company separately accounts for the liability and equity components of the 2024 Convertible Notes. The value of the liability component as of the date of issuance was recognized at the present value of its cash flows using a discount rate of 4.375%, the Company’s borrowing rate at the date of the issuance for a similar debt instrument without the conversion feature, resulting in a debt discount of $165 million, which was allocated to equity as the value of the conversion feature. The 2024 Convertible Notes debt issuance costs were approximately $18 million, of which $15 million was allocated to the debt component and $3 million was allocated to equity. The debt discount and issuance costs are amortized to interest expense over the term of the 2024 Convertible Notes. As of June 29, 2018, debt discount and issuance cost of $169 million remained unamortized.

In February 2018, the Company issued $2.30 billion aggregate principal amount of senior unsecured notes due February 15, 2026 (the “2026 Senior Unsecured Notes”). The 2026 Senior Unsecured Notes bear interest at an annual rate of 4.750% with interest payable on February 15 and August 15 of each year. The Company is not required to make principal payments on the 2026 Senior Unsecured Notes prior to the maturity date. The 2026 Senior Unsecured Notes are jointly and severally guaranteed by certain material domestic subsidiaries of the Company. The 2026 Senior Unsecured Notes issuance costs are amortized to interest expense over the term of the 2026 Senior Unsecured Notes and as of June 29, 2018, issuance costs of $20 million remained unamortized.

In February and March, 2018, the Company completed the redemption of all of its outstanding 7.375% senior secured notes due 2023 in the aggregate principal amount of $1.875 billion (the “2023 Notes”) and the tender offer and redemption and settlement of all of its outstanding 10.50% senior unsecured notes due 2024 in the aggregate principal amount of $3.350 billion (the “2024 Notes” and collectively with the 2023 Notes, the “Redeemed Notes”), including an aggregate of $720 million of “make-whole” and tender premiums required for the tender offer of the 2024 Notes and the optional redemption of the Redeemed Notes in accordance with the applicable indentures and accrued interest through the applicable redemption dates. In November 2017, the Company settled in full the principal amounts of the Euro Term Loan B-2, plus accrued interest, using cash on hand.

In connection with the settlements of the various debt instruments described above, in 2018, the Company recognized an aggregate loss on debt extinguishment of $899 million, consisting of $720 million of “make-whole” and tender premiums and $179 million of unamortized issuance costs. In 2017, the Company incurred losses on the extinguishment of debt of $274 million.

The Credit Agreement requires the Company to comply with certain financial covenants, such as a leverage ratio and an interest coverage ratio. As of June 29, 2018, the Company was in compliance with all financial covenants. In addition, the Credit Agreement requires the Company to comply with customary covenants that limit or restrict the Company’s and its subsidiaries’ ability to incur liens and indebtedness; make certain restricted payments, acquisitions, investments, loans and guarantees; and enter into certain transactions with affiliates, mergers and consolidations. In addition, the indentures governing the 2026 Senior Unsecured Notes and the 2024 Convertible Notes contain restrictive covenants that limit the Company’s and its subsidiaries’ ability to, among other things, consolidate, merge or sell all or substantially all of their assets; create liens; and incur, assume or guarantee additional indebtedness.

Future Debt Payments

As of June 29, 2018, annual future debt payments were as follows:



	Future Debt Payments
	(in millions)
Fiscal year
2019	$	179
2020	278
2021	311
2022	276
2023	6,931
2024 and thereafter	3,400
Total debt maturities	11,375
Issuance costs and debt discounts	(203		)
Net carrying value	$	11,172