Debt

2016 debt transactions

During the first half of 2016, market conditions allowed us to complete a series of transactions that repositioned the maturity profile of our debt and lowered our interest expense. These transactions, including the amounts and accounting impacts, are discussed below.

5% Convertible Senior Notes

During the first six months of 2016, we purchased $188.5 million in par value of our 5% Convertible Senior Notes (the “5% Notes”) due in 2017 at a purchase price of $195.5 million, plus accrued interest using funds held at our holding company. The excess of the purchase price over par value is reflected as a loss on debt extinguishment and outstanding debt issuance costs on the purchased debt were recognized as interest expense on our consolidated statement of operations for the three and six months ended June 30, 2016. The purchases of the 5% Notes reduced our potentially dilutive shares by approximately 14.0 million shares.

9% Convertible Junior Subordinated Debentures

In February 2016, MGIC purchased $132.7 million of par value of our 9% Convertible Junior Subordinated Debentures (the “9% Debentures”) due in 2063 at a purchase price of $150.7 million, plus accrued interest. The 9% Debentures include a conversion feature that allows us, at our option, to make a cash payment to converting holders in lieu of issuing shares of common stock upon conversion of the 9% Debentures. The accounting standards applicable to extinguishment of debt with a cash conversion feature require the consideration paid to be allocated between the extinguishment of the liability component and reacquisition of the equity component. The purchase of the 9% Debentures resulted in an $8.3 million loss on debt extinguishment on the consolidated statement of operations for the six months ended June 30, 2016, which represents the difference between the fair value and the carrying value of the liability component on the purchase date. In addition, our shareholders’ equity was separately reduced by $9.8 million related to the reacquisition of the equity component. For GAAP accounting purposes, the 9% Debentures owned by MGIC are considered retired and are eliminated in our consolidated financial statements and the underlying common stock equivalents, approximately 9.8 million shares, are not included in the computation of diluted shares.

Federal Home Loan Bank Advance

In February 2016, MGIC borrowed $155.0 million in the form of a fixed rate advance from the Federal Home Loan Bank (“FHLB”) (the “Advance”) to provide funds used to purchase the 9% Debentures. Interest on the Advance is payable monthly at an annual rate, fixed for the term of the Advance, of 1.91%. The principal of the Advance matures on February 10, 2023. MGIC may prepay the Advance at any time. Such prepayment would be below par if interest rates have risen after the Advance was originated, or above par if interest rates have declined. The Advance is secured by eligible collateral whose market value must be maintained at 102% of the principal balance of the Advance. MGIC provided eligible collateral from its investment portfolio.

Accounting standard update

As of March 31, 2016 we adopted the accounting update related to the presentation of debt issuance costs in the financial statements. The change in accounting guidance has been applied retrospectively to prior periods. As a result, a reclassification of approximately $11.2 million of debt issuance costs was made on our December 31, 2015 balance sheet, resulting in a reduction to other assets and a reduction to long-term debt; there was no impact on our consolidated statement of operations or retained earnings.

The impact of the reclassification of debt issuance costs on our outstanding debt obligations as of December 31, 2015 is as follows.



	December 31, 2015
(In millions)	As previously reported		Adjustment			As Adjusted
Convertible Senior Notes, interest at 5% per annum, due May 2017	$	333.5	$	(2.0	)	$	331.5
Convertible Senior Notes, interest at 2% per annum, due April 2020	500.0		(9.2		)	490.8
Convertible Junior Subordinated Debentures, interest at 9% per annum, due April 2063	389.5		—			389.5
Total long-term debt	$	1,223.0	$	(11.2	)	$	1,211.8

The principal amounts of our debt obligations and their aggregate carrying value as of June 30, 2016 and December 31, 2015 were as follows.



(In millions)	June 30, 2016			December 31, 2015
FHLB Advance, interest at 1.91% per annum, due February 2023	$	155.0		$	—
Convertible Senior Notes, interest at 5% per annum, due May 2017 ⁽¹⁾	145.0			333.5
Convertible Senior Notes, interest at 2% per annum, due April 2020 ^{(2) (3)}	500.0			500.0
Convertible Junior Subordinated Debentures, interest at 9% per annum, due April 2063 ⁽⁴⁾	256.9			389.5
Long-term debt, par value	1,056.9			1,223.0
Less: Debt issuance costs on convertible senior notes	(8.7		)	(11.2		)
Long-term debt, carrying value	$	1,048.2		$	1,211.8


⁽¹⁾	Convertible at any time prior to maturity at the holder’s option, at an initial conversion rate, which is subject to adjustment, of 74.4186 shares per $1,000 principal amount, representing an initial conversion price of approximately $13.44 per share.

⁽²⁾

Prior to January 1, 2020, the 2% Convertible Senior Notes are convertible only upon satisfaction of one or more conditions. One such condition is that during any calendar quarter commencing after March 31, 2014, the last reported sale price of our common stock for each of at least 20 trading days during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter be greater than or equal to 130% of the applicable conversion price on each applicable trading day. The 2% Notes are convertible at an initial conversion rate, which is subject to adjustment, of 143.8332 shares per $1,000 principal amount, representing an initial conversion price of approximately $6.95 per share. 130% of such conversion price is $9.03. On or after January 1, 2020, holders may convert their notes irrespective of satisfaction of the conditions.

⁽³⁾

Prior to April 10, 2017, the notes will not be redeemable. On any business day on or after April 10, 2017 we may redeem for cash all or part of the notes, at our option, at a redemption rate equal to 100% of the principal amount of the notes being redeemed, plus any accrued and unpaid interest, if the closing sale price of our common stock exceeds 130% of the then prevailing conversion price of the notes for each of at least 20 of the 30 consecutive trading days preceding notice of the redemption.

⁽⁴⁾

Convertible at any time prior to maturity at the holder’s option, at an initial conversion rate, which is subject to adjustment, of 74.0741 shares per $1,000 principal amount, representing an initial conversion price of approximately $13.50 per share. If a holder elects to convert their debentures, deferred interest owed on the debentures being converted is also converted into shares of our common stock. The conversion rate for any deferred interest is based on the average price that our shares traded at during a 5-day period immediately prior to the election to convert. In lieu of issuing shares of common stock upon conversion of the debentures, we may, at our option, make a cash payment to converting holders for all or some of the shares of our common stock otherwise issuable upon conversion.

The Convertible Senior Notes and Convertible Junior Subordinated Debentures are obligations of our holding company, MGIC Investment Corporation, and not of its subsidiaries. As of June 30, 2016, we had approximately $217 million in cash and investments at our holding company. The net unrealized gains on our holding company investment portfolio were approximately $0.5 million as of June 30, 2016. The modified duration of the holding company investment portfolio, excluding cash and cash equivalents, was 1.4 years at June 30, 2016.

Interest payments on our debt obligations appear below.



	Six Months Ended June 30,
(In millions)	2016		2015
FHLB Advance, interest at 1.91% per annum, due February 2023	$	0.9	$	—
Senior Notes, interest at 5.375% per annum, due November 2015	—		1.7
Convertible Senior Notes, interest at 5% per annum, due May 2017	6.9		8.6
Convertible Senior Notes, interest at 2% per annum, due April 2020	5.0		5.0
Convertible Junior Subordinated Debentures, interest at 9% per annum, due April 2063	15.9		17.5
Total interest payments	$	28.7	$	32.8