CarMax 2009 Annual Report Download - page 56

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have measured a current fair value. The value of retained subordinated bonds was $87.4 million as of
February 28, 2009, and $43.1 million as of February 29, 2008.
Key Assumptions Used in Measuring the Fair Value of the Retained Interest and Sensitivity Analysis
The following table shows the key economic assumptions used in measuring the fair value of the retained interest as
of February 28, 2009, and a sensitivity analysis showing the hypothetical effect on the retained interest if there were
unfavorable variations from the assumptions used. These sensitivity analyses are hypothetical and should be used
with caution. In this table, the effect of a variation in a particular assumption on the fair value of the retained interest
is calculated without changing any other assumption; in actual circumstances, changes in one factor could result in
changes in another, which might magnify or counteract the sensitivities.
KEY ASSUMPTIONS
(In millions)
Assumptions
Used
Impact on Fair
Value of 10%
Adverse
Change
Impact on Fair
Value of 20%
Adverse
Change
Prepayment rate........................................................................... 1.36% - 1.46% $ 8.1 $ 15.7
Cumulative net loss rate .............................................................. 1.65% - 4.00% $10.3 $ 20.7
Annual discount rate.................................................................... 19.00% $ 6.0 $ 11.7
Warehouse facility costs (1) .......................................................... 2.05% $ 3.8 $ 7.7
(1) Expressed as a spread above appropriate benchmark rates. Applies only to retained interest in receivables securitized
through the warehouse facility. As of February 28, 2009, there were receivables of $1.22 billion funded in the warehouse
facility.
Prepayment rate. We use the Absolute Prepayment Model or “ABS” to estimate prepayments. This model assumes
a rate of prepayment each month relative to the original number of receivables in a pool of receivables. ABS further
assumes that all the receivables are the same size and amortize at the same rate and that each receivable in each
month of its life will either be paid as scheduled or prepaid in full. For example, in a pool of receivables originally
containing 10,000 receivables, a 1% ABS rate means that 100 receivables prepay each month.
Cumulative net loss rate. The cumulative net loss rate, or “static pool” net losses, is calculated by dividing the total
projected credit losses of a pool of receivables, net of recoveries, by the original pool balance. Projected net credit
losses are estimated using the losses experienced to date, the credit quality of the receivables, economic factors and
the performance history of similar receivables.
Annual discount rate. The discount rate is the interest rate used for computing the present value of future cash
flows and is determined based on the perceived market risk of the underlying auto loan receivables and current
market conditions.
Warehouse facility costs. While receivables are securitized in the warehouse facility, our retained interest is exposed to
changes in credit spreads and other variable funding costs. The warehouse facility costs are expressed as a spread above
applicable benchmark rates.
Continuing Involvement with Securitized Receivables
We continue to manage the auto loan receivables that we securitize. We receive servicing fees of approximately 1%
of the outstanding principal balance of the securitized receivables. We believe that the servicing fees specified in
the securitization agreements adequately compensate us for servicing the securitized receivables. No servicing asset
or liability has been recorded. We are at risk for the retained interest in the securitized receivables and, if the
securitized receivables do not perform as originally projected, the value of the retained interest would be impacted.