Note 7 — Long-Term Debt

Long-term debt consisted of the following as of December 31, 2012 and 2011 (in thousands):


		2012		2011

Term Loans (mature July 2015)	$	367,181	$	279,750
Revolving Credit Facility (matures July 2015)		100,000		-
2025 Notes (mature December 2025)		3,487		300,000
2032 Notes (mature March 2032)		200,000		-
Senior Unsecured Notes (mature January 2016)		274,960		474,960
MARAD Debt (matures February 2027)		105,288		110,166
Unamoritized debt discount		(31,688)		(9,555)
Total debt		1,019,228		1,155,321
Less current maturities		(16,607)		(7,877)
Long-term debt	$	1,002,621	$	1,147,444

Senior Unsecured Notes

In December 2007, we issued $550 million of 9.5% Senior Unsecured Notes due 2016 (“Senior Unsecured Notes”). The Senior Unsecured Notes are fully and unconditionally guaranteed by substantially all of our existing restricted domestic subsidiaries, except for Cal Dive I-Title XI, Inc. In addition, any future restricted domestic subsidiaries that guarantee any of our indebtedness and/or our restricted subsidiaries’ indebtedness are required to guarantee the Senior Unsecured Notes. Our foreign subsidiaries are not guarantors.

The Senior Unsecured Notes are junior in right of payment to all our existing and future secured indebtedness and obligations and rank equally in right of payment with all of our existing and future senior unsecured indebtedness. The Senior Unsecured Notes rank senior in right of payment to any of our future subordinated indebtedness.

The Senior Unsecured Notes mature on January 15, 2016. Interest on the Senior Unsecured Notes accrues at the fixed rate of 9.5% per annum and is payable semiannually in arrears on each January 15 and July 15, and commenced on July 15, 2008. Interest is computed on the basis of a 360-day year comprising twelve 30-day months.

Included in the Indenture governing the Senior Unsecured Notes are terms, conditions and covenants that are customary for this type of indebtedness. The covenants include limitations on our and our subsidiaries’ ability to incur additional indebtedness, pay dividends, repurchase our common stock, and sell or transfer assets. As of December 31, 2012, we were in compliance with these covenants.

Prior to stated maturity, we may redeem all or a portion of the Senior Unsecured Notes on no less than 30 days’ and no more than 60 days’ prior notice at the redemption prices (expressed as percentages of the principal amount) set forth below, plus accrued and unpaid interest, if any, thereon to the applicable redemption date.


Year		Redemption Price

2012		104.750%
2013		102.375%
2014 and thereafter		100.000%

In the event a change of control (as defined in the governing Indenture) of the Company occurs, each holder of the Senior Unsecured Notes will have the right to require us to purchase all or any part of such holder’s Senior Unsecured Notes. In such event, we are required to offer to purchase all of the Senior Unsecured Notes at a purchase price in cash in an amount equal to 101% of the principal amount, plus accrued and unpaid interest, if any, to the date of purchase.

At December 31, 2010, we had $550.0 million of Senior Unsecured Notes outstanding. In 2011, we purchased a portion of our Senior Unsecured Notes that resulted in the early extinguishment of an aggregate $75.0 million of those notes. In these transactions we paid an aggregate amount of $77.4 million, including $75.0 million in principal and $2.4 million in premium for the repurchased Senior Unsecured Notes. We also paid the accrued interest on these Senior Unsecured Notes totaling $0.8 million and we recorded a $0.9 million charge to interest expense to accelerate a pro rata portion of the deferred financing costs associated with the issuance of the Senior Unsecured Notes in 2007.

At December 31, 2011, we had $475.0 million of Senior Unsecured Notes outstanding. In March 2012, we purchased a portion of these Senior Unsecured Notes which resulted in an early extinguishment of $200.0 million of our balance outstanding. In these transactions we paid an aggregate amount of $213.5 million, including $200.0 million in principal, a $9.5 million premium and $4.0 million of accrued interest. We also recorded a $2.0 million charge to accelerate a pro rata portion of the deferred financing costs associated with the original issuance of the Senior Unsecured Notes. The loss on the early extinguishment of these Senior Unsecured Notes totaled $11.5 million and is reflected as a component of “Loss on early extinguishment of long-term debt” in the accompanying consolidated statements of operations.

Credit Agreement

In July 2006, we entered into a credit agreement (the “Credit Agreement”) under which we borrowed $835 million in a term loan (the “Term Loan B”) and were able to borrow up to $300 million (the “Revolving Loans”) under a revolving credit facility (the “Revolving Credit Facility”). The Credit Agreement has been amended seven times, with the most recent amendment occurring in September 2012. These amendments address certain issues with regard to covenants, maturity and the borrowing limits under the Term Loan B and the Revolving Loans.

In February 2013, we amended the credit agreement to waive certain year end oil and gas reporting requirements and covenant compliance as a result of the sale of ERT.

In September 2012, we amended the credit agreement to primarily:

	•		permit investments in (i) non-guarantor, non-pledged subsidiaries and (ii) joint ventures, provided that after giving effect to each such investment, a minimum consolidated liquidity requirement of $400 million is met on a pro forma basis;
	•		increase the debt basket for foreign subsidiaries (other than specified foreign subsidiaries that currently are excepted from this debt basket) from $200 million to $400 million provided that such indebtedness is non-recourse to us and our other subsidiaries (the “Foreign Subsidiary Debt Basket”); and
	•		exclude, to the extent it otherwise would be included in the calculation of financial covenants, EBITDA, interest charges and indebtedness related to assets secured by, or otherwise subject to, the indebtedness permitted by the Foreign Subsidiary Debt Basket.

In February 2012, we entered into a separate amendment to our Credit Agreement. Under the terms of this amendment, the participating lenders agreed to loan us $100.0 million pursuant to an additional term loan (the “Term Loan A”). The terms of the Term Loan A are the same as those governing the Revolving Credit Facility, with the Term Loan A requiring a $5 million annual payment of its principal balance. The Term Loan A was funded in late March 2012 and we used the borrowings under the Term Loan A to repurchase a portion of our Senior Unsecured Notes.

Our Term Loan debt currently bears interest at the one-, two-, three- or six-month LIBOR or on Base Rates at our current election plus an applicable margin between 2.25% and 3.5% depending on our consolidated leverage ratio. The average interest rates on our Term Loan debt for the years ended December 31, 2012 and 2011 were approximately 3.7% and 3.8%, respectively, including the effects of our interest rate swaps (Note 17). The Term Loans are currently scheduled to mature on July 1, 2015 but could be extended to July 1, 2016 if our Senior Unsecured Notes are fully repaid or refinanced by July 1, 2015.

Our Revolving Credit Facility provides for $600 million in borrowing capacity. The full amount of the Revolving Credit Facility may be used for issuances of letters of credit. These letters of credit primarily guarantee asset retirement obligations as well as various contract bidding, contractual performance, insurance activities and shipyard commitments. The Revolving Loans bear interest based on one-, two-, three- or six-month LIBOR rates or on Base Rates at our current election, plus an applicable margin. The margin ranges from 1.5% to 3.5%, depending on our consolidated leverage ratio. Fees associated with outstanding letters of credit range from 2.0% to 3.0%, depending on our consolidated leverage ratio. We also pay a fixed commitment fee of 0.5% on the unused portion of our Revolving Credit Facility. In March 2012, we borrowed $100.0 million under our Revolving Credit Facility to repurchase a portion of our Senior Unsecured Notes. Accordingly, at December 31, 2012, we had $100.0 million drawn on the Revolving Credit Facility and our availability under the Revolving Credit Facility totaled $487.6 million, net of $12.4 million of letters of credit issued. The average interest rate under the Revolving Credit Facility totaled 3.0% for the period in which we had borrowings outstanding during the year ended December 31, 2012. There were no borrowings outstanding at December 31, 2011.

We may elect to prepay amounts outstanding under the Term Loans without prepayment penalty, but may not reborrow any amounts prepaid. We may prepay amounts outstanding under the Revolving Loans without prepayment penalty, and may reborrow amounts prepaid prior to maturity. In addition, upon the occurrence of certain dispositions or the issuance or incurrence of certain types of indebtedness, we may be required to prepay a portion of the Term Loan debt and borrowings under the Revolving Credit Facility equal to the amount of proceeds received from such occurrences (in the event of a disposition of assets comprising collateral, 60% of the after-tax proceeds). Such prepayments will be applied first to the Term Loan B, and any excess will then be applied to the Term Loan A and the Revolving Credit Facility on a pro rata basis. In February 2013, we repaid $293.9 million of our Term Loans and $24.5 million under our Revolving Credit Facility with the after-tax proceeds from the sale of ERT. At February 19, 2013, the remaining balance on our Term Loan debt totaled $73.3 million and the balance outstanding on our Revolving Credit Facility totaled $78.1 million.

The Credit Agreement and the other ancillary loan documents (together, the “Loan Documents”) include terms, conditions and covenants that we consider customary for this type of indebtedness. The covenants include restrictions on the Company’s and our subsidiaries’ ability to grant liens, incur indebtedness, make investments, merge or consolidate, sell or transfer assets and pay dividends. The Credit Agreement also places certain annual and aggregate limits on expenditures for acquisitions, investments in joint ventures and capital expenditures. The Credit Agreement requires us to meet certain minimum financial ratios for interest coverage, consolidated leverage, senior secured debt leverage and, until we achieve investment grade ratings from Standard & Poor’s and Moody’s, collateral coverage.

If we or any of our subsidiaries do not pay any amounts owed to the lenders under the Credit Agreement when due, breach any other covenant to the lenders or fail to pay other debt above a stated threshold, in each case, subject to applicable cure periods, the lenders have the right to stop making advances to us and to declare the outstanding loans immediately due. The Credit Agreement includes other events of default that are customary for this type of transaction. As of December 31, 2012, we were in compliance with all debt covenants and restrictions.

The loans and our other obligations to the lenders under the Credit Agreement are guaranteed by all of our U.S. subsidiaries except Cal Dive I-Title XI, Inc., and are secured by a lien on substantially all of our assets and properties and all the assets and properties of our U.S. subsidiaries except Cal Dive I-Title XI, Inc. In addition, we have pledged a portion of the shares of our significant foreign subsidiaries to the lenders as additional security. The Credit Agreement also contains provisions that limit our ability to incur certain types of additional indebtedness. These provisions effectively prohibit us from incurring any additional secured indebtedness or indebtedness guaranteed by us. The Credit Agreement does however permit us to incur certain unsecured indebtedness, and also provides for our subsidiaries to incur project financing indebtedness (such as our MARAD loans) secured by the underlying asset, provided that the indebtedness is not guaranteed by us.

Convertible Senior Notes Due 2025

In March 2005, we issued $300 million of our 3.25% Convertible Senior Notes due 2025 at 100% of the principal amount to certain qualified institutional buyers (“2025 Notes”). The effective interest rate for the 2025 Notes is 6.6% after considering the effect of the accretion of the related debt discount that represented the equity component of the 2025 Notes at their inception.

In association with the issuance of additional Convertible Senior Notes (see “Convertible Senior Notes Due 2032” below) in March 2012, we repurchased $142.2 million in aggregate principal of our 2025 Notes. In these repurchase transactions we paid an aggregate amount of $145.1 million, representing principal plus $1.8 million of premium and $1.1 million of accrued interest. The loss on the early extinguishment of these related 2025 Notes totaled $5.6 million and is reflected as a component of “Loss on early extinguishment of long-term debt” in the accompanying consolidated statements of operations. The loss on early extinguishment includes the acceleration of $3.5 million of related unamortized discount associated with the 2025 Notes, the $1.8 million premium paid in connection with the repurchase of a portion of the 2025 Notes and a $0.3 million charge to accelerate a pro rata portion of the deferred financing costs associated with the original issuance of these 2025 Notes.

As of the date of this filing, there are no outstanding 2025 Notes. The repayment of this debt occurred when holders of $154.3 million of the 2025 Notes exercised their option on December 15, 2012 to require us to repurchase their 2025 Notes and we repurchased the remaining $3.5 million of the 2025 Notes in February 2013.

Our weighted average share price for 2012, 2011 and 2010 was below the $32.14 per share conversion price. As a result, there are no shares included in our diluted earnings per share calculation associated with the assumed conversion of our 2025 Notes.

Convertible Senior Notes Due 2032

In March 2012, we completed the public offering and sale of $200.0 million in aggregate principal amount of 3.25% Convertible Senior Notes due 2032 (“2032 Notes”). The net proceeds from the issuance of the 2032 Notes were $195.0 million, after deducting the underwriter’s discounts and commissions and estimated offering expenses. We used the net proceeds to repurchase and retire $142.2 million of aggregate principal amount of our 2025 Notes (see above), in separate, privately negotiated transactions. The remaining net proceeds were used for other general corporate purposes, including the repayment of other indebtedness.

The registered 2032 Notes bear interest at a rate of 3.25% per annum, and are payable semi-annually in arrears on March 15 and September 15 of each year, beginning on September 15, 2012. The 2032 Notes will mature on March 15, 2032, unless earlier converted, redeemed or repurchased by us. The 2032 Notes are convertible in certain circumstances and during certain periods at an initial conversion rate of 39.9752 shares of common stock per $1,000 principal amount of the 2032 Notes (which represents an initial conversion price of approximately $25.02 per share of common stock), subject to adjustment in certain circumstances as set forth in the indenture governing the 2032 Notes. The initial conversion price represents a conversion premium of 35.0% over the closing price of our common stock on March 6, 2012 of $18.53 per share.

Prior to March 20, 2018, the 2032 Notes will not be redeemable. On or after March 20, 2018, we may, at our option, redeem some or all of the 2032 Notes in cash, at any time, upon at least 30 days’ notice at a price equal to 100% of the principal amount plus accrued and unpaid interest (including contingent interest, if any) up to but excluding the redemption date. Holders may require us to purchase in cash some or all of their 2032 Notes at a repurchase price equal to 100% of the principal amount of the 2032 Notes, plus accrued and unpaid interest (including contingent interest, if any) up to but excluding the applicable repurchase date, on March 15, 2018, March 15, 2022 and March 15, 2027, or, subject to specified exceptions, at any time prior to the 2032 Notes’ maturity following a fundamental change (as defined in the governing indenture).

In connection with the issuance of our 2032 Notes, we recorded a discount of $35.4 million as required under existing accounting requirements. To arrive at this discount amount, we estimated the fair value of the liability component of the 2032 Notes as of the date of their issuance (March 12, 2012) using an income approach. To determine this estimated fair value, we used borrowing rates of similar market transactions involving comparable liabilities at the time of issuance and an expected life of 6.0 years. In selecting the expected life, we selected the earliest date that the holder could require us to repurchase all or a portion of the 2032 Notes (March 15, 2018). The effective interest rate for the 2032 Notes is 6.9% after considering the effect of the accretion of the related debt discount that represented the equity component of the 2032 Notes at their inception.

Our weighted average share price for 2012 was below the $25.02 per share conversion price. As a result, there are no shares included in our diluted earnings per share calculation associated with the assumed conversion of our 2032 Notes.

MARAD Debt

This U.S. government guaranteed financing ("MARAD Debt") is pursuant to Title XI of the Merchant Marine Act of 1936 administered by the Maritime Administration, and was used to finance the construction of the Q4000. The MARAD Debt is payable in equal semi-annual installments beginning in August 2002 and matures 25 years from such date. The MARAD Debt is collateralized by the Q4000, with us guaranteeing 50% of the debt, and initially bore interest at a floating rate which approximated AAA Commercial Paper yields plus 20 basis points. As provided for in the MARAD Debt agreements, in September 2005, we fixed the interest rate on the debt through the issuance of a 4.93% fixed-rate note with the same maturity date (February 2027). In accordance with the MARAD Debt agreements, we are required to comply with certain covenants and restrictions, including the maintenance of minimum net worth, working capital and debt-to-equity requirements. At December 31, 2012, we were in compliance with these debt covenants.

Other

In accordance with our Credit Agreement, Senior Unsecured Notes, 2025 Notes, 2032 Notes and MARAD Debt agreements, we are required to comply with certain covenants, including the maintenance of minimum net worth, working capital and debt-to-equity requirements, and restrictions that limit our ability to incur certain types of additional indebtedness. As of December 31, 2012, we were in compliance with these covenants and restrictions.

We paid financing costs associated with our debt totaling $7.6 million in 2012 and $9.3 million in 2011. Unamortized deferred financing costs are included in “Other assets, net” in the accompanying consolidated balance sheets and are being amortized over the life of the respective debt agreements. The following table reflects the components of our deferred financing costs for the years ended December 31, 2012 and 2011 (in thousands):


		2012						2011
		Gross Carrying Amount		Accumulated Amortization		Net		Gross Carrying Amount		Accumulated Amortization		Net

Term Loans (mature July 2015)	$	15,318	$	(11,595)	$	3,723	$	13,680	$	(10,257)	$	3,423
Revolving Credit Facility (matures July 2015)		20,021		(12,466)		7,555		19,236		(9,640)		9,596
2025 Notes (mature December 2025)		8,189		(8,189)		-		8,189		(7,340)		849
2032 Notes (mature March 2032)		4,251		(534)		3,717		78		-		78
Senior Unsecured Notes (mature January 2016)		10,643		(8,252)		2,391		10,643		(5,546)		5,097
MARAD Debt (matures February 2027)		12,200		(5,248)		6,952		12,200		(4,760)		7,440
Total deferred financing costs	$	70,622	$	(46,284)	$	24,338	$	64,026	$	(37,543)	$	26,483

Scheduled maturities of long-term debt outstanding as of December 31, 2012 are as follows (in thousands):


		Term Loan⁽¹⁾		Revolving Credit Facility ⁽¹⁾		Senior Unsecured Notes		2025 Notes⁽²⁾		MARAD Debt		2032 Notes⁽³⁾		Total

Less than one year	$	8,000	$	-	$	-	$	3,487	$	5,120	$	-	$	16,607
One to two years		8,000		-		-		-		5,376		-		13,376
Two to three years		351,181		100,000		-		-		5,644		-		456,825
Three to four years		-		-		274,960		-		5,926		-		280,886
Four to five years		-		-		-		-		6,222		-		6,222
Over five years		-		-		-		-		77,000		200,000		277,000
Total debt		367,181		100,000		274,960		3,487		105,288		200,000		1,050,916
Current maturities		(8,000)		-		-		(3,487)		(5,120)		-		(16,607)
Long-term debt, less current maturities	$	359,181	$	100,000	$	274,960	$	-	$	100,168	$	200,000	$	1,034,309
Unamortized debt discount⁽⁴⁾		-		-		-		-		-		(31,688)		(31,688)
Long-term debt	$	359,181	$	100,000	$	274,960	$	-	$	100,168	$	168,312	$	1,002,621

(1) Term Loan amounts reflect both our Term Loan A and Term Loan B. In February 2013, we repaid $293.9 million of our Term Loans and $24.5 million under our Revolving Credit Facility with the after-tax proceeds from the sale of ERT.

(2) We repurchased the remainder of the 2025 Notes in February 2013 (see “2025 Notes” above).

(3) Beginning in March 2018, the holders of these Convertible Senior Notes may require us to repurchase these notes or we may at our own option elect to repurchase notes. These notes will mature in March 2032.

(4) The notes will increase to their principal amount through accretion of non-cash interest charges through March 2018 for the Convertible Senior Notes due 2032.

The following table details our interest expense and capitalized interest for the years ended December 31, 2012, 2011 and 2010 (in thousands):


		Year Ended December 31,
		2012		2011		2010

Interest expense	$	53,601	$	72,824	$	78,609
Interest income		(548)		(1,366)		(546)
Capitalized interest		(4,893)		(1,277)		(12,474)
Interest expense, net	$	48,160	$	70,181	$	65,589