SHORT-TERM AND LONG-TERM DEBT

Outstanding Term Loan Payable

The net carrying values of Ciena's term loans were comprised of the following for the fiscal periods indicated (in thousands):



	October 31, 2017		October 31, 2016
Term Loan Payable due July 15, 2019	$	—	$	241,359
Term Loan Payable due April 25, 2021	—		244,944
Term Loan Payable due January 30, 2022	392,972		—
	$	392,972	$	486,303

The term loan balances in the table above reflect Ciena's adoption of ASU 2015-03, as described in Note 1 above. Deferred debt issuance costs that were deducted from the carrying amounts of the term loans totaled $3.1 million at October 31, 2017 and $4.9 million at October 31, 2016. Deferred debt issuance costs are amortized using the straight-line method, which approximates the effect of the effective interest rate method, through the maturity of the term loans. The amortization of deferred debt issuance costs for these term loans is included in interest expense, and was $0.9 million, $1.1 million and $0.8 during fiscal 2017, fiscal 2016 and fiscal 2015, respectively. The carrying values of the term loans listed above are also net of any unamortized debt discounts.

2022 Term Loan

On January 30, 2017, Ciena, as borrower, and Ciena Communications, Inc. and Ciena Government Solutions, Inc., as guarantors, entered into an Omnibus Refinancing Amendment to the Credit Agreement, Security Agreement and Pledge Agreement with the lenders party thereto and the administrative agent (the “Refinancing Agreement”), pursuant to which Ciena refinanced its existing 2019 Term Loan and 2021 Term Loan (as described under "Prior Term Loans" below) into a single term loan with an aggregate principal amount of $400 million maturing on January 30, 2022 (the “2022 Term Loan”). In connection with the transaction, Ciena received a loan in the amount of $399.5 million, net of original discount, from the 2022 Term Loan and repaid $493.1 million of outstanding principal under the 2019 Term Loan and 2021 Term Loan. The 2022 Term Loan requires Ciena to make installment payments of approximately $1.0 million on a quarterly basis. This arrangement was accounted for as a modification of debt and, as such, $2.9 million of debt issuance costs associated with the 2022 Term Loan were expensed. The aggregate balance of $3.5 million of debt issuance costs and approximately $1.7 million of original discount from the 2019 Term Loan and the 2021 Term Loan, and approximately $0.5 million of original discount from the 2022 Term Loan, were included in the carrying value of the 2022 Term Loan.

The Refinancing Agreement amends the Term Loan Credit Agreement (as defined below) and provides that the 2022 Term Loan will, among other things:


•	be subject to mandatory prepayment on the same basis as under the Term Loan Credit Agreement;


•	bear interest, at Ciena’s election, at a per annum rate equal to (a) LIBOR (subject to a floor of 0.75%) plus an applicable margin of 2.50%, or (b) a base rate (subject to a floor of 1.75%) plus an applicable margin of 1.50%; and


•	be repayable at any time at Ciena's election, provided that repayment of the 2022 Term Loan with proceeds of certain indebtedness prior to July 30, 2017 will require a prepayment premium of 1.00% of the aggregate principal amount of such prepayment.

Except as amended by the Refinancing Agreement, the remaining terms of the Term Loan Credit Agreement remain in full force and effect.

The principal balance, unamortized debt discount, deferred debt issuance costs and net carrying value of the liability components of Ciena's 2022 Term Loan were as follows as of October 31, 2017 (in thousands):




	Principal Balance		Unamortized Discount			Deferred Debt Issuance Costs			Net Carrying Value
Term Loan Payable due January 30, 2022	$	398,000	$	(1,923	)	$	(3,105	)	$	392,972

The following table sets forth the carrying value and the estimated fair value of Ciena's 2022 Term Loan (in thousands):



	October 31, 2017
	Carrying Value⁽¹⁾			Fair Value⁽²⁾
Term Loan Payable due January 30, 2022	$	392,972	—	$	398,995


(1)	Includes unamortized debt discount and debt issuance costs.


(2)	Ciena's term loan is categorized as Level 2 in the fair value hierarchy. Ciena estimated the fair value of its 2022 Term Loan using a market approach based upon observable inputs, such as current market transactions involving comparable securities.

Prior Term Loans

On July 15, 2014, Ciena entered into a Term Loan Credit Agreement (the "Term Loan Credit Agreement") providing for senior secured term loans in an aggregate principal amount of $250 million (the “2019 Term Loan”) with a maturity date of July 15, 2019. The 2019 Term Loan required Ciena to make installment payments of approximately $0.6 million on a quarterly basis.

On April 25, 2016, Ciena entered into an Incremental Joinder and Amendment Agreement (the “Incremental Term Loan Credit Agreement”) that amended the Term Loan Credit Agreement. The Incremental Term Loan Credit Agreement provided for a new tranche of senior secured term loans under the Term Loan Credit Agreement in an aggregate principal amount of $250 million (the “2021 Term Loan”). The 2021 Term Loan required Ciena to make installment payments of approximately $0.6 million on a quarterly basis.

Outstanding Convertible Notes Payable

The net carrying values of Ciena's outstanding convertible notes payable was comprised of the following for the fiscal periods indicated (in thousands):



	October 31, 2017		October 31, 2016
0.875% Convertible Senior Notes due June 15, 2017	$	—	$	231,240
3.75% Convertible Senior Notes due October 15, 2018 (Original)	61,071		347,630
3.75% Convertible Senior Notes due October 15, 2018 (New)	287,221		—
4.0% Convertible Senior Notes due December 15, 2020	194,717		188,509
	$	543,009	$	767,379

The convertible notes payable balances in the table above reflects Ciena's adoption of ASU 2015-03, as described in Note 1 above. Deferred debt issuance costs that were deducted from the carrying amounts of the convertible notes payable totaled $2.1 million at October 31, 2017 and $4.0 million at October 31, 2016. Deferred debt issuance costs are amortized using the straight-line method, which approximates the effect of the effective interest rate method, through the maturity of the convertible notes payable.The amortization of deferred debt issuance costs for these convertible notes are included in interest expense, and were $1.8 million, $2.7 million and $3.2 million during fiscal 2017, fiscal 2016 and fiscal 2015, respectively. The carrying values of the term loans listed above are also net of any unamortized debt discounts.

Ciena has three issuances of convertible notes payable outstanding. The notes are senior unsecured obligations of Ciena and rank equally with all of Ciena’s other existing and future senior unsecured debt. The indentures governing Ciena’s notes provide for customary events of default which include (subject in certain cases to customary grace and cure periods), among others, the following: nonpayment of principal or interest; breach of covenants or other agreements in the indenture; defaults in or failure to pay certain other indebtedness; and certain events of bankruptcy or insolvency. Generally, if an event of default occurs and is continuing, the trustee or the holders of at least 25% in aggregate principal amount of the notes may declare the principal of, accrued interest on, and premium, if any, on all the notes immediately due and payable. Under the indentures, if Ciena undergoes a “fundamental change” (as that term is defined in the indenture governing the notes to include certain change in control transactions), holders of notes will have the right, subject to certain exemptions, to require Ciena to purchase for cash any or all of their notes at a price equal to the principal amount, plus accrued interest. If the holder elects to convert his or her notes in connection with a specified fundamental change Ciena will be required, in certain circumstances, to increase the applicable conversion rate, depending on the price paid per share for Ciena common stock and the effective date of the fundamental change.

0.875% Convertible Senior Notes due June 15, 2017

On June 11, 2007, Ciena completed a public offering of 0.875% Convertible Senior Notes due June 15, 2017 (the “2017 Notes”), in aggregate principal amount of $500.0 million. Interest was payable on June 15 and December 15 of each year, beginning on December 15, 2007.

At the election of the holder, the 2017 Notes could be converted prior to maturity into shares of Ciena common stock at the initial conversion rate of 26.2154 shares per $1,000 in principal amount, which is equivalent to an initial conversion price of approximately $38.15 per share. The 2017 Notes were not redeemable by Ciena prior to maturity.

Ciena used approximately $42.5 million of the net proceeds of this offering to purchase a call spread option on its common stock that intended to limit exposure to potential dilution from conversion of the 2017 Notes. See Note 19 below for a description of this call spread option.

During fiscal 2016 and fiscal 2017, Ciena entered into certain private transactions to repurchase $262.5 million and $46.3 million of the 2017 Notes, respectively, in cash for purchase prices slightly below par. On July 15, 2017, the outstanding 0.875% Convertible Senior Notes matured and Ciena repaid the approximately $185.3 million in aggregate principal amount outstanding, together with approximately $0.8 million in accrued interest through the date of maturity.

3.75% Convertible Senior Notes, due October 15, 2018

On October 18, 2010, Ciena completed a private placement of 3.75% Convertible Senior Notes due October 15, 2018 (the “Original Notes”), in aggregate principal amount of $350.0 million. Interest is payable on the Original Notes on April 15 and October 15 of each year, beginning on April 15, 2011.

At the election of the holder, the Original Notes may be converted prior to maturity into shares of Ciena common stock at the initial conversion rate of 49.5872 shares per $1,000 in principal amount, which is equivalent to an initial conversion price of approximately $20.17 per share. The net proceeds from the offering were approximately $340.4 million after deducting the placement agents’ fees and other fees and expenses.

On August 2, 2017, Ciena completed its offer to exchange its outstanding 3.75% Convertible Senior Notes due 2018 (the “Original Notes”) for a new series of 3.75% Convertible Senior Notes due 2018 (the “New Notes”) and an exchange fee of $2.50 per $1,000 original principal amount, or $0.7 million. Following settlement of the exchange, $61.3 million in aggregate principal amount at maturity of Original Notes and $288.7 million in aggregate principal amount at maturity of the New Notes were outstanding. Interest is payable on the New Notes on April 15 and October 15 of each year, beginning October 15, 2017.

The New Notes give Ciena the option, at its election, to settle conversions of such notes for cash, shares of its common stock, or a combination of cash and shares equal to the aggregate amount due upon conversion. It is Ciena’s intent to settle the principal amount of the New Notes in cash upon any conversion. As a result, only the amounts payable in excess of the principal amounts upon conversion of the New Notes are considered diluted earnings per share under the treasury stock method. Except with respect to the additional cash settlement options upon conversion, the New Notes were issued on substantially the same terms as the Original Notes including the holder conversion option and interest payment dates described above. Since the calculated fair value of the liability component was greater than the fair value of the New Notes, there was no impact to equity for the New Notes. This arrangement was accounted for as a modification of debt and, as such, $0.7 million of debt issuance costs associated with the New Notes was expensed, and the aggregate balance of $1.2 million of debt issuance costs for the Old Notes and approximately $0.7 million of original discount from the New Notes were included in the carrying value of the New Notes.

4.0% Convertible Senior Notes due December 15, 2020

On December 27, 2012, Ciena issued $187.5 million in aggregate principal amount of 4.0% Convertible Senior Notes due December 15, 2020 (the “2020 Notes”) in separate private offerings in exchange for $187.5 million in aggregate principal amount of 2015 Notes above.

The 2020 Notes are senior unsecured obligations and rank equally with all of Ciena’s other existing and future senior unsecured debt. The 2020 Notes pay interest from the date of issuance at a rate of 4.0% per year. The interest is payable semi-annually on June 15 and December 15, commencing on June 15, 2013. The principal amount of the 2020 Notes will also accrete at a rate of 1.85% per year commencing December 27, 2012, compounding on a semi-annual basis. The accreted portion of the principal payable at maturity does not bear interest and is not convertible into shares of Ciena’s common stock. The 2020 Notes will mature on December 15, 2020. Consequently, in the event the 2020 Notes are converted, the accreted liability will extinguish without payment.

The 2020 Notes may be converted prior to maturity, at the option of the holder, into shares of Ciena’s common stock at an initial conversion rate of 49.0557 shares of common stock per $1,000 in original principal amount, which is equal to an initial conversion price of $20.39 per share. In addition, Ciena may elect to convert the 2020 Notes, in whole or in part, at any time on or prior to December 15, 2020, if the daily volume weighted average price of the common stock equals or exceeds 130% of the conversion price then in effect for at least 20 trading days in any 30 consecutive trading day period. If Ciena elects to convert the 2020 Notes on or before maturity, the conversion rate will be adjusted to include an amount of additional shares, determined by reference to a make-whole table, payable in Ciena common stock, or its cash equivalent, at Ciena’s election. An aggregate of 9,197,944 shares of Ciena common stock issuable upon conversion of the 2020 Notes has been reserved for issuance.

Upon certain fundamental changes, holders of the 2020 Notes have the option to require Ciena to purchase the 2020 Notes at a price equal to the accreted principal amount of the notes delivered for repurchase plus any accrued and unpaid interest on the original principal amount. Upon a holder’s election to convert the 2020 Notes in connection with certain fundamental changes, the conversion rate will be adjusted to include an amount of additional shares, determined by reference to a make-whole table, payable in Ciena common stock, or its cash equivalent, at Ciena’s election.

Accounting guidance issued by the FASB requires the issuer of convertible debt instruments with cash settlement features, including partial cash settlement, to account separately for the liability and equity components of the instrument. Under this guidance, the debt is recognized at the present value of its cash flows discounted using the issuer’s nonconvertible debt borrowing rate at the time of issuance, and the equity component is recognized as the difference between the proceeds from the issuance of the note and the fair value of the liability. The reduced carrying value on the convertible debt results in a debt discount that is accreted back to the convertible debt’s principal amount through the recognition of non-cash interest expense over the expected life of the debt, which results in recognizing the interest expense on these borrowings at effective rates approximating what Ciena would have incurred had nonconvertible debt with otherwise similar terms been issued.

Because the additional make-whole shares can be settled in cash or common stock at Ciena’s option, the debt and equity components were accounted for separately. Ciena measured the fair value of the debt component of the 2020 Notes using an effective interest rate of 7.0%. As a result, Ciena attributed $170.4 million of the fair value of the 2020 Notes to the debt component. The debt component was netted against the face value of the 2020 Notes to determine the debt discount. The debt discount will be accreted over the period from the date of issuance to the contractual maturity date, resulting in the recognition of non-cash interest expense. In addition, Ciena recorded $43.1 million within additional paid-in capital representing the equity component of the 2020 Notes. There was no net tax expense recorded at that time due to Ciena’s full valuation allowance against its deferred tax assets.

The 2020 Notes were issued pursuant to an Indenture entered into as of December 27, 2012 (the “Indenture”) with The Bank of New York Mellon Trust Company, N.A., as trustee. The Indenture provides for customary events of default which include (subject in certain cases to customary grace and cure periods), among others, the following: nonpayment of principal (including accreted portion) or interest; breach of covenants or other agreements in the Indenture; defaults in failure to pay certain other indebtedness; and certain events of bankruptcy or insolvency. Generally, if an event of default occurs and is continuing under the Indenture, the trustee or the holders of at least 25% in aggregate original principal amount of the 2020 Notes then outstanding may declare the principal (including accreted portion), premium, if any, and accrued interest on all the 2020 Notes immediately due and payable.

The principal balance, unamortized discount, deferred debt issuance costs and net carrying value of the liability and equity components of Ciena’s outstanding issues of convertible notes were as follows as of October 31, 2017:



	Liability Component										Equity Component
	Principal Balance		Unamortized Discount			Deferred Debt Issuance Costs			Net Carrying Amount		Net Carrying Amount
Original 3.75% Convertible Senior Notes, due October 15, 2018	$	61,270	$	—		$	(199	)	$	61,071	$	—
New 3.75% Convertible Senior Notes, due October 15, 2018	$	288,730	$	(574	)	$	(935	)	$	287,221	$	—
4.0% Convertible Senior Notes due December 15, 2020	$	204,963	$	(9,289	)	$	(957	)	$	194,717	$	43,131

The following table sets forth, in thousands, the carrying value and the estimated current fair value of Ciena’s outstanding convertible notes:



	October 31, 2017
Description	Carrying Value		Fair Value⁽¹⁾
Original 3.75% Convertible Senior Notes, due October 15, 2018	$	61,071	$	71,900
New 3.75% Convertible Senior Notes, due October 15, 2018⁽²⁾	287,221		338,825
4.0% Convertible Senior Notes, due December 15, 2020⁽³⁾	194,717		244,406
	$	543,009	$	655,131

_________________________________


(1)	The convertible notes were categorized as Level 2 in the fair value hierarchy. Ciena estimates the fair value of its outstanding convertible notes using a market approach based on observable inputs, such as current market transactions involving comparable securities.


(2)	Includes unamortized discount.


(3)	Includes unamortized discount and accretion of principal.