Note 10. Debts and Letters of Credit

As of January 2, 2016 and June 27, 2015, the Company’s long-term debt on the Consolidated Balance Sheets represented the carrying amount of the liability component of the 0.625% Senior Convertible Notes as discussed below. The following table presents the carrying amounts of the liability and equity components (in millions):



	January 2, 2016			June 27, 2015
Principal amount of 0.625% Senior Convertible Notes	$	650.0		$	650.0
Unamortized discount of liability component	(75.2		)	(88.4		)
Carrying amount of liability component	$	574.8		$	561.6

Carrying amount of equity component (1)	$	134.4		$	134.4


(1)	Included in Accumulated paid-in-capital on the Consolidated Balance Sheets.

The Company was in compliance with all debt covenants and held no short term debt as of January 2, 2016 and June 27, 2015.

0.625% Senior Convertible Notes

On August 21, 2013, the Company issued $650.0 million aggregate principal amount of 0.625% Senior Convertible Notes due 2033 in a private offering to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended. The proceeds from the 2033 Notes amounted to $636.3 million after issuance costs. The 2033 Notes are an unsecured obligation of the Company and bear interest at an annual rate of 0.625% payable in cash semi-annually in arrears on February 15 and August 15 of each year. The 2033 Notes mature on August 15, 2033 unless earlier converted, redeemed or repurchased. The 2033 Notes and its terms are described in “Note 10. Debts and Letters of Credit” of the Company’s Annual Report on Form 10-K for the year ended June 27, 2015.

Following the separation of the Lumentum business on August 1, 2015, the conversion price per share was adjusted pursuant to the terms of the 2033 Notes relating to the occurrence of a spin-off event. Effective as of the end of the business day on August 17, 2015, the initial conversion price per share was adjusted to $11.28 per share of the Company’s common stock traded on NASDAQ under the ticker symbol “VIAV.”

In accordance with the authoritative accounting guidance, the Company separated the 2033 Notes into liability and equity components. The carrying value of the liability component at issuance was calculated as the present value of its cash flows using a discount rate of 5.4% based on the 5-year swap rate plus credit spread as of the issuance date. The credit spread for the Company is based on the historical average “yield to worst” rate for BB rated issuers. The difference between the 2033 Notes principal and the carrying value of the liability component, representing the value of conversion premium assigned to the equity component, was recorded as a debt discount on the issuance date and is being accreted using the effective interest rate of 5.4% over the period from the issuance date through August 15, 2018 as a non-cash charge to interest expense. The carrying value of the liability component was determined to be $515.6 million, and the equity component, or debt discount, of the 2033 Notes was determined to be $134.4 million. As of January 2, 2016, the expected remaining term of the 2033 Notes is 2.6 years.

In connection with the issuance of the 2033 Notes, the Company incurred $13.7 million of issuance costs, which were bifurcated into the debt issuance costs, attributable to the liability component of $10.9 million and the equity issuance costs, attributable to the equity component of $2.8 million based on their relative values. The debt issuance costs were capitalized and are being amortized to interest expense using the effective interest rate method from issuance date through August 15, 2018. The equity issuance costs were netted against the equity component in additional paid-in capital at the issuance date. As of January 2, 2016, the unamortized portion of the debt issuance costs related to the 2033 Notes was $6.1 million, which was included in Other non-current assets on the Consolidated Balance Sheets.

Based on quoted market prices as of January 2, 2016 and June 27, 2015, the fair value of the 2033 Notes was approximately $610.1 million and $644.0 million. The 2033 Notes are classified within Level 2 as they are not actively traded in markets.

The following table presents the effective interest rate and the interest expense for the contractual interest and the accretion of debt discount (in millions, except for the effective interest rate):



	Three Months Ended						Six Months Ended
	January 2, 2016			December 27, 2014			January 2, 2016			December 27, 2014
Effective interest rate	5.4		%	5.4		%	5.4		%	5.4		%
Interest expense-contractual interest	$	1.0		$	1.0		$	2.0		$	2.0
Accretion of debt discount	6.6			6.3			13.2			12.5

Outstanding Letters of Credit

As of January 2, 2016, the Company had 10 standby letters of credit totaling $14.3 million.