ARCH CAPITAL GROUP LTD.ACGL
ARCH CAPITAL GROUP LTD. Debt Disclosure
Debt and Financing Arrangements
The Company’s senior notes payable at December 31, 2018 and 2017 were as follows:
Carrying Amount at | |||||||||||||||
Interest | Principal | December 31, | |||||||||||||
(Fixed) | Amount | 2018 | 2017 | ||||||||||||
2034 notes (1) | 7.350 | % | 300,000 | 297,150 | 297,053 | ||||||||||
2043 notes (2) | 5.144 | % | 500,000 | 494,723 | 494,621 | ||||||||||
2026 notes (3) | 4.011 | % | 500,000 | 496,417 | 496,043 | ||||||||||
2046 notes (4) | 5.031 | % | 450,000 | 445,238 | 445,167 | ||||||||||
$ | 1,750,000 | $ | 1,733,528 | $ | 1,732,884 | ||||||||||
(1) Senior notes of Arch Capital issued on May 4, 2004 and due May 1, 2034 (“2034 notes”).
(2) Senior notes of Arch-U.S., a wholly-owned subsidiary of Arch Capital, issued on December 13, 2013 and due November 1, 2043 (“2043 notes”), fully and unconditionally guaranteed by Arch Capital.
(3) Senior notes of Arch Capital Finance LLC (“Arch Finance”), a wholly-owned finance subsidiary of Arch Capital, issued on December 8, 2016 and due December 15, 2026 (“2026 notes”), fully and unconditionally guaranteed by Arch Capital.
(4) Senior notes of Arch Finance issued on December 8, 2016 and due December 15, 2046 (“2046 notes”), fully and unconditionally guaranteed by Arch Capital.
The 2034 notes are Arch Capital’s senior unsecured obligations and rank equally with all of its existing and future senior unsecured indebtedness. Interest payments on the 2034 notes are due on May 1st and November 1st of each year. Arch Capital may redeem the 2034 notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price.
The 2043 notes are unsecured and unsubordinated obligations of Arch-U.S. and Arch Capital, respectively, and rank equally and ratably with the other unsecured and unsubordinated indebtedness of Arch-U.S. and Arch Capital, respectively. Interest payments on the 2043 notes are due on May 1st and November 1st of each year. Arch-U.S. may redeem the 2043 notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price.
The 2026 notes are unsecured and unsubordinated obligations of Arch Finance and Arch Capital, respectively, and rank equally and ratably with the other unsecured and unsubordinated indebtedness of Arch Finance and Arch Capital, respectively. Interest payments on the 2026 notes are due on June 15th and December 15th of each year. Arch Finance may redeem the 2026 notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price.
The 2046 notes are unsecured and unsubordinated obligations of Arch Finance and Arch Capital, respectively, and rank equally and ratably with the other unsecured and unsubordinated indebtedness of Arch Finance and Arch Capital, respectively. Interest payments on the 2046 notes are due on June 15th and December 15th of each year. Arch Finance may redeem the 2046 notes at any time and from time to time, in whole or in part, at a “make-whole” redemption price.
Letter of Credit and Revolving Credit Facilities
In the normal course of its operations, the Company enters into agreements with financial institutions to obtain secured and unsecured credit facilities.
On October 26, 2016, Arch Capital and certain of its subsidiaries entered into an $850.0 million five-year credit facility (the “Credit Facility”) with a syndication of lenders. The Credit Facility consists of a $350.0 million secured facility for letters of credit (the “Secured Facility”) and a $500.0 million unsecured facility for revolving loans and letters of credit (the “Unsecured Facility”). Obligations of each borrower under the Secured Facility for letters of credit are secured by cash and eligible securities of such borrower held in collateral accounts. Subject to the receipt of commitments, the Secured Facility may be increased by up to an aggregate of $350.0 million, and the Unsecured Facility may be increased to an amount not to exceed $750.0 million. Arch Capital has a one-time option to convert any or all outstanding revolving loans of Arch Capital and/or Arch-U.S. to term loans with the same terms as the revolving loans except that any prepayments may not be re-borrowed. Arch-U.S. guarantees the obligations of Arch Capital, and Arch Capital guarantees the obligations of Arch-U.S. Borrowings of revolving loans may be made at a variable rate based on LIBOR or an alternative base rate at the option of Arch Capital. Secured letters of credit are available for issuance on behalf of Arch Capital insurance and reinsurance subsidiaries. The Credit Facility is structured such that each party that requests a letter of credit or borrowing does so only for itself and for only its own obligations.
The Credit Facility contains certain restrictive covenants customary for facilities of this type, including restrictions on indebtedness, consolidated tangible net worth, minimum shareholders’ equity levels and minimum financial strength ratings. Arch Capital and its subsidiaries which are party to the agreement were in compliance with all covenants contained therein at December 31, 2018.
Commitments under the Credit Facility will expire on October 26, 2021, and all loans then outstanding must be repaid. Letters of credit issued under the Unsecured Facility will not have an expiration date later than October 26, 2022.
Under the $350.0 million secured letter of credit facility, Arch Capital’s subsidiaries had $174.8 million of letters of credit outstanding and remaining capacity of $175.2 million at December 31, 2018. In addition, certain of Arch Capital’s subsidiaries had outstanding letters of credit of $167.5 million, which were issued in the normal course of business. When issued, these letters of credit are secured by a portion of the investment portfolio. At December 31, 2018, these letters of credit were secured by investments with a fair value of $362.0 million.
Watford Re has access to a $100 million letter of credit facility expiring on May 16, 2019 and an $800 million secured credit facility expiring on November 30, 2021, that provides for borrowings and the issuance of letters of credit not to exceed $400 million. Borrowings of revolving loans may be made by Watford Re at a variable rate based on LIBOR or an alternative base rate at the option of Watford Re. At December 31, 2018, Watford Re had $68.9 million in outstanding letters of credit under the two facilities and $455.7 million of borrowings outstanding under the secured credit facility, backed by Watford Re’s investment portfolio. Watford Re was in compliance with all covenants contained in both of its credit facilities at December 31, 2018. The Company does not guarantee or provide credit support for Watford Re, and the Company’s financial exposure to Watford Re is limited to its investment in Watford Re’s common and preferred shares and counterparty credit risk (mitigated by collateral) arising from the reinsurance transactions.
The Company’s outstanding revolving credit agreement borrowings were as follows:
Year Ended December 31, | ||||||||
2018 | 2017 | |||||||
Arch-U.S. | $ | — | $ | 375,000 | ||||
Watford Re | 455,682 | 441,132 | ||||||
Total revolving credit agreement borrowings | $ | 455,682 | $ | 816,132 | ||||
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About Debt Disclosures
Debt disclosures detail a company's borrowing structure — the types of instruments, interest rates, maturity schedule, and covenant restrictions that define its financial obligations and flexibility. This section is essential for assessing refinancing risk, interest rate exposure, and the margin of safety against financial distress.
Key signals: the maturity schedule reveals concentration risk — large maturities within 1-2 years during tight credit markets can force dilutive refinancing or asset sales. Compare the fair value of debt against carrying amount to gauge whether the market views the company's credit risk differently than the balance sheet suggests. Watch covenant compliance disclosures for tightening cushions, especially leverage and interest coverage ratios. Variable-rate debt exposure quantifies sensitivity to interest rate changes. Secured versus unsecured mix affects recovery rates and future borrowing capacity. Compare net debt-to-EBITDA against industry peers and covenant limits to assess financial health.