Debt

Debt consisted of the following as of March 31, 2017 and July 1, 2016:



	March 31, 2017			July 1, 2016
	(in millions)
Variable interest rate Term Loan A maturing 2021	$	4,125		$	4,125
Variable interest rate U.S. Term Loan B maturing 2023	—			3,750
Variable interest rate U.S. Term Loan B-2 maturing 2023	2,978			—
Variable interest rate Euro Term Loan B maturing 2023⁽¹⁾	—			987
Variable interest rate Euro Term Loan B-2 maturing 2023⁽¹⁾	938			—
7.375% senior secured notes due 2023	1,875			1,875
10.500% senior unsecured notes due 2024	3,350			3,350
Convertible senior notes	35			439
Bridge loans	—			3,000
Total debt	13,301			17,526
Issuance costs and debt discounts	(213		)	(532		)
Subtotal	13,088			16,994
Less bridge loans and current portion of long-term debt	(181		)	(3,334		)
Long-term debt	$	12,907		$	13,660


⁽¹⁾	Euro Term Loan B and Euro Term Loan B-2 outstanding principal amounts as of March 31, 2017 and July 1, 2016 were based upon the Euro to U.S. dollar exchange rate as of those respective dates.

Credit Agreement – Term Loans and Revolving Credit Facility

On April 29, 2016, the Company entered into a credit agreement (the “Credit Agreement”) that provided for a $4.125 billion Term Loan A, a $3.750 billion U.S. Term Loan B, a €885 million Euro Term Loan B and a $1.0 billion revolving credit facility. The revolving credit facility includes a $200 million sublimit for letters of credit.

On August 17, 2016, the Company borrowed $3.0 billion under a new U.S. dollar-denominated term loan (“U.S. Term Loan B-1”) under the Credit Agreement and used the proceeds of this new loan and cash of $750 million to prepay in full the U.S. Term Loan B previously outstanding under the Credit Agreement. On September 22, 2016, the Company borrowed €885 million under a new Euro-denominated term loan (“Euro Term Loan B-1”) under the Credit Agreement and used the proceeds of this new loan to prepay in full the Euro Term Loan B previously outstanding under the Credit Agreement. In connection with the settlement of the U.S. Term Loan B and Euro Term Loan B, the Company recognized a loss on debt extinguishment of $227 million consisting of unamortized issuance costs and debt discount fees.

On March 14, 2017, the Company borrowed $2.985 billion under a new U.S. dollar-denominated term loan (“U.S. Term Loan B-2”) under the Credit Agreement and used the proceeds of this new loan to prepay in full the U.S. Term Loan B-1 previously outstanding under the Credit Agreement. The U.S. Term Loan B-2 has an interest rate equal to, at the Company’s option, either an adjusted LIBOR rate, subject to a 0.75% floor, plus 2.75% or a base rate plus 1.75% (3.73% as of March 31, 2017). Principal payments on U.S. Term Loan B-2 of 0.25% are due quarterly and began on March 31, 2017 with the balance due on April 29, 2023. The U.S. Term Loan B-2 issuance costs of $2 million are amortized to interest expense over the term of the loan. As of March 31, 2017, issuance costs of $2 million remain unamortized.

On March 23, 2017, the Company borrowed €881 million under a new Euro-denominated term loan (“Euro Term Loan B-2”) under the Credit Agreement and used the proceeds of this new loan to prepay in full the Euro Term Loan B-1 previously outstanding under the Credit Agreement. The Euro Term Loan B-2 has an interest rate equal to an adjusted EURIBOR rate, subject to a 0.75% floor, plus 2.00% (2.75% as of March 31, 2017). Principal payments on Euro Term Loan B-2 of 0.25% are due quarterly and began on March 31, 2017 with the balance due on April 29, 2023. The Euro Term Loan B-2 issuance costs of $1 million are amortized to interest expense over the term of the loan. As of March 31, 2017, issuance costs of $1 million remain unamortized.

In connection with the settlement of the U.S. Term Loan B-1 and Euro Term Loan B-1, the Company recognized a loss of $7 million consisting of unamortized issuance costs and debt discount fees.

As of March 31, 2017, the revolving credit facility was not drawn upon, and there was no outstanding balance.

Beginning in September 2017, the Company is required to make quarterly principal payments on Term Loan A totaling $206 million in 2018, $309 million in 2019, $413 million in 2020 and the remaining balance of $3.197 billion due in 2021. As of March 31, 2017, Term Loan A had an outstanding balance of $4.125 billion with a variable interest rate of 2.98%.

The obligations under the Credit Agreement are guaranteed by HGST, Inc., WD Media, LLC, Western Digital (Fremont), LLC and Western Digital Technologies, Inc. (“WDT”) (together referred to as the “WD Guarantors”), and are secured on a first-priority basis by a lien on substantially all the assets and properties of the Company and the WD Guarantors, including all of the capital stock held by these entities (subject to a 65% limitation on pledges of capital stock of foreign subsidiaries and domestic holding companies of foreign subsidiaries), subject to certain exceptions.

The term loans and the revolving credit loans under the Credit Agreement may be prepaid in whole or in part at any time without premium or penalty, subject to certain conditions, except that the U.S. Term Loan B-2 and the Euro Term Loan B-2 require the Company to pay a 1.0% prepayment fee if the loans thereunder are repaid in connection with certain “repricing” transactions on or before September 14, 2017, with respect to U.S. Term Loan B-2, and September 23, 2017, with respect to Euro Term Loan B-2.

The Credit Agreement requires the Company to comply with certain financial covenants, such as a leverage ratio and an interest coverage ratio. In addition, the documents governing substantially all of the Company’s outstanding debt, including the Credit Agreement, require 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.

Additional Bridge Facility

On May 12, 2016, WDT entered into a short-term senior secured bridge credit agreement providing for $3.0 billion in aggregate principal amount of senior secured bridge loans. On July 21, 2016, the Company repaid in full the $3.0 billion aggregate principal amount outstanding, together with accrued interest.

Senior Notes

On April 13, 2016, the Company completed an offering of its $1.875 billion aggregate principal amount of 7.375% senior secured notes due 2023 (the “Secured Notes”) and $3.350 billion aggregate principal amount of 10.500% senior unsecured notes due 2024 (the “Initial Unsecured Notes”). On January 6, 2017, to fulfill the Company’s obligations under the registration rights agreement associated with the Initial Unsecured Notes, the Company commenced an exchange offer to exchange all of these outstanding unsecured notes for an equal principal amount of new 10.500% senior unsecured notes due 2024 (the “New Unsecured Notes”), with substantially the same terms as the Initial Unsecured Notes. On February 6, 2017, the exchange offer expired and substantially all of the outstanding Initial Unsecured Notes were tendered in the exchange offer and accepted by the Company. The New Unsecured Notes are registered under the Securities Act of 1933, as amended, and have no transfer restrictions or rights to additional interest. The Initial Unsecured Notes, the New Unsecured Notes and the Secured Notes are collectively referred to as the “Notes”.

The Company is not required to make principal payments on the Notes prior to their respective maturity dates, except that the Company may be required to offer to purchase the Notes upon the occurrence of a change of control (as defined in the indentures governing the Notes) or with the proceeds of certain non-ordinary course asset sales. Interest payments on the Notes are due semi-annually in arrears.

The Notes are guaranteed by the WD Guarantors, and the Secured Notes and related guarantees are secured on an equal and ratable basis by liens on the same assets that secure indebtedness under the Credit Agreement.

Convertible Notes, Exchange Options and Call Options

As of July 1, 2016, the Company had outstanding, through the acquisition of SanDisk, $129 million aggregate principal amount of its 1.5% Convertible Senior Notes due 2017 (the “2017 Notes”) and $310 million aggregate principal amount of its 0.5% Convertible Senior Notes due 2020 (the “2020 Notes” and, together with the 2017 Notes, the “Convertible Notes”). The 2017 Notes mature on August 15, 2017 and the 2020 Notes mature on November 15, 2020.

During the three months ended March 31, 2017, the Company repurchased an immaterial amount of the 2017 Notes. During the nine months ended March 31, 2017, the Company paid to the holders of the Convertible Notes for conversion and repurchase, $494 million of cash and 0.3 million shares of the Company’s common stock with an aggregate value of $16 million.

As of March 31, 2017, $35 million principal amount of the 2020 Notes and an immaterial principal amount of the 2017 Notes were outstanding. For the 2020 Notes that remain outstanding, the conversion rate is 10.9006 units of reference property per $1,000 principal amount of the 2020 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 Notes are not currently exchangeable into reference property.

The 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 income (expense), net in the condensed 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 was reported in Accrued expenses and Other liabilities in the condensed consolidated balance sheets. See Note 4 to the condensed consolidated financial statements for additional disclosures related to the fair values of the exchange options. For the three and nine months ended March 31, 2017, the change in the fair value of the outstanding exchange options related to the Convertible Notes resulted in an immaterial loss.

In connection with the SanDisk acquisition, the Company assumed the outstanding call options entered into by SanDisk at the inception of the respective Convertible Notes, which were structured to reduce the potential economic dilution associated with the conversion of Convertible Notes. The call options are derivative instruments classified as an asset that result in the Company receiving cash and shares that partially offset the Company’s obligation upon conversion of the Convertible Notes. The fair value of the unredeemed and unsettled call options was reported in Other current assets and Other non-current assets in the condensed consolidated balance sheets. During the nine months ended March 31, 2017, under the call options, the Company received $61 million of cash and 0.1 million shares of the Company’s common stock which had an aggregate value of $11 million. During the three and nine months ended March 31, 2017, the Company recognized an immaterial non-cash loss related to the change in value in the outstanding call options. The value of the call options as of March 31, 2017 was immaterial.

The conversion and repurchase of the Convertible Notes and related settlement of the call options during the three and nine months ended March 31, 2017 resulted in an immaterial net loss.