12. Short-Term and Long-Term Debt

Details underlying short-term and long-term debt (in millions) were as follows:



	As of December 31,
	2013		2012
Short-Term Debt
Current maturities of long-term debt	$	500	$	200
Unamortized premiums (discounts)		1		-
Total short-term debt	$	501	$	200

Long-Term Debt, Excluding Current Portion
Senior notes:
4.75% notes, due 2014	$	-	$	300
4.75% notes, due 2014		-		200
4.30% notes, due 2015 (1)		250		250
LIBOR + 3 bps notes, due 2017 (2)		250		250
7.00% notes, due 2018		200		200
LIBOR + 110 bps loan, due 2018		250		-
8.75% notes, due 2019 (1)		487		487
6.25% notes, due 2020 (1)		300		300
4.85% notes, due 2021 (1)		300		300
4.20% notes, due 2022 (1)		300		300
4.00% notes, due 2023 (1)		350		-
6.15% notes, due 2036 (1)		498		498
6.30% notes, due 2037 (1)(2)		375		375
7.00% notes, due 2040 (1)(2)		500		500
Total senior notes		4,060		3,960

Capital securities:
7.00%, due 2066		722		722
6.05%, due 2067		491		491
Total capital securities		1,213		1,213
Unamortized premiums (discounts)		(12)		(3)
Fair value hedge – interest rate swap agreements		59		269
Total unamortized premiums (discounts) and fair value
hedge – interest rate swap agreements		47		266
Total long-term debt	$	5,320	$	5,439

⁽¹⁾

We have the option to repurchase the outstanding notes by paying the greater of 100% of the principal amount of the notes to be redeemed or the make-whole amount (as defined in each note agreement), plus in each case any accrued and unpaid interest as of the date of redemption.

⁽²⁾

Categorized as operating debt for leverage ratio calculations as the proceeds were used as a long-term structured solution to reduce the strain on increasing statutory reserves associated with secondary guarantee UL and term policies.

Details underlying the recognition of a gain (loss) on the extinguishment of debt (in millions) reported within interest and debt expense on our Consolidated Statements of Comprehensive Income (Loss) were as follows:



	For the Years Ended December 31,
	2013		2012		2011
Principal balance outstanding prior to payoff (1)	$	-	$	15	$	275
Unamortized debt issuance costs and discounts prior to payoff		-		-		(8)
Amount paid to retire		-		(20)		(275)
Gain (loss) on extinguishment of debt, pre-tax	$	-	$	(5)	$	(8)

⁽¹⁾

During the fourth quarter of 2012, we repurchased $13 million of our 8.75% senior notes due 2019 and $2 million of our 6.15% senior notes due 2036. During the third quarter of 2011, we repurchased all of our 6.75% capital securities due 2066.

Future principal payments due on long-term debt (in millions) as of December 31, 2013, were as follows:



2014	$	500
2015		250
2016		-
2017		250
2018		450
Thereafter		4,323
Total	$	5,773

For our long-term debt outstanding, unsecured senior debt, which consists of senior notes, fixed-rate notes and other notes with varying interest rates, ranks highest in priority, followed by capital securities.

Credit Facilities and Letters of Credit (“LOCs”)

Credit facilities, which allow for borrowing or issuances of LOCs, and LOCs (in millions) were as follows:



		As of December 31, 2013
	Expiration	Maximum		LOCs
	Date	Available		Issued
Credit Facilities
Five-year revolving credit facility	May-2018	$	2,500	$	866
LOC facility	Mar-2023		156		156
LOC facility	Mar-2023		883		848
LOC facility	Aug-2031		805		791
LOC facility	Oct-2031		996		996
Total		$	5,340	$	3,657

Effective as of May 29, 2013, we entered into a credit agreement with a syndicate of banks. This agreement (the “credit facility”) allows for the issuance of LOCs of up to $2.5 billion and borrowing of up to $2.5 billion, $1.75 billion of which is available only to reimburse the banks for drawn LOCs. The credit facility is unsecured and has a commitment termination date of May 29, 2018. The LOCs support inter-company reinsurance transactions and specific treaties associated with our business sold through reinsurance. LOCs are used primarily to satisfy the U.S. regulatory requirements of our domestic insurance companies for which reserve credit is provided by our affiliated reinsurance companies and our domestic clients of the business sold through reinsurance.

The credit facility contains or includes:

Customary terms and conditions, including covenants restricting our ability to incur liens, merge or consolidate with another entity where we are not the surviving entity and dispose of all or substantially all of our assets;

Financial covenants including maintenance of a minimum consolidated net worth (as defined in the facility) equal to the sum of $9.4 billion plus 50% of the aggregate net proceeds of equity issuances received by us in accordance with the terms of the credit facility; and a debt-to-capital ratio as defined in accordance with the credit facility not to exceed 0.35 to 1.00; and

Customary events of default, subject to certain materiality thresholds and grace periods for certain of those events of default.

Upon an event of default, the credit facility provides that, among other things, the commitments may be terminated and the loans then outstanding may be declared due and payable. As of December 31, 2013, we were in compliance with all such covenants.

This credit facility replaced our previous four-year credit facility dated as of June 10, 2011, that was scheduled to expire on June 10, 2015.

On December 23, 2013, we entered into a credit facility agreement with a third-party lender. Under the agreement, the lender issued an irrevocable LOC effective December 23, 2013, with a maximum scheduled LOC amount of up to approximately $156 million. The LOC supports certain fees owed to another third-party lender and is automatically renewable until March 31, 2023. On October 30, 2012, one of our wholly-owned subsidiaries amended and restated the credit facility agreement entered into on November 1, 2011, with a third-party lender. Under the amended and restated agreement, the lender issued an irrevocable LOC effective October 30, 2012, with a maximum scheduled LOC amount of up to approximately $1.0 billion. The LOC supports an inter-company reinsurance agreement and expires October 1, 2031. On August 20, 2012, one of our wholly-owned subsidiaries amended the credit facility agreement entered into on August 26, 2011, with a third-party lender. Under the amended agreement, the lender issued an irrevocable LOC effective August 20, 2012, with a maximum scheduled LOC amount of up to approximately $863 million. The LOC supports an inter-company reinsurance agreement and expires August 26, 2031. On April 28, 2011, certain of our wholly-owned subsidiaries amended and restated the reimbursement agreement entered into on December 31, 2009, with a third-party lender. Under the amended agreement, the lender issued an irrevocable LOC effective April 1, 2011, with a maximum scheduled LOC amount of up to approximately $925 million. The LOC supports an inter-company reinsurance agreement and expires March 31, 2023.

These agreements each contain customary terms and conditions, including early termination fees, covenants restricting the ability of the subsidiaries to incur liens, merge or consolidate with another entity and dispose of all or substantially all of their assets. Upon an event of early termination, the agreements require the immediate payment of all or a portion of the present value of the future LOC fees that would have otherwise been paid. Further, the agreements contain customary events of default, subject to certain materiality thresholds and grace periods for certain of those events of default. The events of default include payment defaults, covenant defaults, material inaccuracies in representations and warranties, bankruptcy and liquidation proceedings and other customary defaults. Upon an event of default, the agreements provide that, among other things, obligations to issue, amend or increase the amount of any LOC shall be terminated and any obligations shall become immediately due and payable. As of December 31, 2013, we were in compliance with all such covenants.

Effective October 1, 2013, one of our wholly-owned subsidiaries entered into a third-party financing arrangement that supports an inter-company reinsurance agreement. The arrangement provides for a maximum scheduled financing capacity of up to $700 million and expires on October 1, 2028.

Shelf Registration

We currently have an effective shelf registration statement, which allows us to issue, in unlimited amounts, securities, including debt securities, preferred stock, common stock, warrants, stock purchase contracts, stock purchase units and trust preferred securities of our affiliated trusts.

Certain Debt Covenants on Capital Securities

Our $1.2 billion in principal amount of capital securities outstanding contain certain covenants that require us to make interest payments in accordance with an alternative coupon satisfaction mechanism (“ACSM”) if we determine that one of the following trigger events exists as of the 30th day prior to an interest payment date (“determination date”):

LNL’s risk-based capital ratio is less than 175% (based on the most recent annual financial statement filed with the State of Indiana); or

(i) The sum of our consolidated net income for the four trailing fiscal quarters ending on the quarter that is two quarters prior to the most recently completed quarter prior to the determination date is zero or negative; and (ii) our consolidated stockholders’ equity (excluding accumulated other comprehensive income and any increase in stockholders’ equity resulting from the issuance of preferred stock during a quarter), or “adjusted stockholders’ equity,” as of (x) the most recently completed quarter and (y) the end of the quarter that is two quarters before the most recently completed quarter, has declined by 10% or more as compared to the quarter that is 10 fiscal quarters prior to the last completed quarter, or the “benchmark quarter.”

The ACSM would generally require us to use commercially reasonable efforts to satisfy our obligation to pay interest in full on the capital securities with the net proceeds from sales of our common stock and warrants to purchase our common stock with an exercise price greater than the market price. We would have to utilize the ACSM until the trigger events no longer existed. Our failure to pay interest pursuant to the ACSM will not result in an event of default with respect to the capital securities nor will a nonpayment of interest unless it lasts for 10 consecutive years, although such breaches may result in monetary damages to the holders of the capital securities.