First Data 2007 Annual Report Download - page 82

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company is exposed to market risk from changes in interest rates. The Company's assets include both fixed and floating rate interest-bearing
securities. These investments arise primarily from the Company's sale of payment instruments (principally official checks and money orders). The Company
invests the proceeds from the sale of these instruments, pending the settlement of the payment instrument obligation. The Company has classified these
investments as available-for-sale. Accordingly, they are carried on the Company's Consolidated Balance Sheets at fair market value. A portion of the
Company's Integrated Payment Systems ("IPS") business involves the payment of commissions to selling agents of its official check and money order
products and such commissions are computed based on short-term variable rates.
In February 2007, the Company announced its intent to gradually exit the official check and money order businesses. The Company expects the wind-
down of the majority of the business to take place in 2008. As of December 31, 2007, a majority of the long-term instruments held earlier in the year
associated with these businesses had been converted into instruments of shorter duration. In conjunction with the repositioning of the portfolio, the Company
terminated the associated interest rate swaps.
To the extent the IPS business pays commissions based on short-term variable rates to its selling agents and invests the proceeds from the sale of
payment instruments in floating rate or short-term investments, interest rate risk exists related to the relative spreads between different interest rate
indices. Additionally, to the extent there is a fixed rate commission and IPS invests the proceeds from the sale of payment instruments in floating rate or short-
term investments, the IPS business is also subject to interest rate volatility.
The Company's interest rate-sensitive liabilities are its debt instruments. On September 24, 2007, the Company was acquired through a merger with an
entity controlled by an affiliate of Kohlberg Kravis Roberts & Co. ("KKR"). The merger has had a material impact on the Company's interest rate risk due to
newly issued variable rate debt and associated interest rate swaps. As of December 31, 2007, the Company had approximately $20 billion of variable rate debt
and had swapped $7.5 billion of this variable rate debt to fixed. Of the $20 billion in variable rate debt, approximately $1 billion is euro denominated. The
Company may refinance up to approximately $7 billion of the variable rate debt with fixed rate debt on or before one year from the transaction date.
The Company cannot perform a meaningful sensitivity analysis comparing a change in interest rates to prior year balances due to the significant change
in its capital structure. Using the December 31, 2007 balances, a 10% proportionate increase in short-term interest rates on an annualized basis compared to
the interest rates at December 31, 2007 and a corresponding and parallel shift in the remainder of the yield curve, would result in a decrease to pretax income
of approximately $33 million. The majority of this decrease relates to a $60 million decrease (based on the 10% increase noted above which equates to
approximately 50 basis point increase in interest rates) that primarily relates to the Company's balance of variable interest rate debt, net of interest rate swaps,
at December 31, 2007. Partially offsetting this decrease is a $27 million increase (based on the 10% increase noted above which equates to a 39 basis point
increase in the interest rates) associated with operating cash balances, settlement related cash balances, expected investment positions, and commissions paid
to selling agents. Conversely, a corresponding decrease in interest rates would result in a comparable increase to pretax earnings. Actual interest rates could
change significantly more than 10%. There are inherent limitations in the sensitivity analysis presented, primarily due to the assumption that interest rate
movements are linear and instantaneous. As a result, the analysis is unable to reflect the potential effects of more complex market changes that could arise,
which may positively or negatively affect income.
Foreign Currency Risk
The Company is exposed to changes in currency rates as a result of its investments in foreign operations, revenues generated in currencies other than
the U.S. dollar and foreign currency denominated loans. Revenue and profit generated by international operations will increase or decrease compared to prior
periods as a result of changes in foreign currency exchange rates. In connection with the merger, the intent of management towards its intercompany
investments and certain net investment hedges were changed. Such decisions have resulted in a different foreign currency risk exposure than what existed
prior to the merger.
After consideration of changes in intent associated with the merger, a hypothetical uniform 10% weakening in the value of the U.S. dollar relative to all
the currencies in which the Company's revenues and profits are denominated would result in a decrease to pretax income of approximately $59 million. The
majority of the decrease results from a $104 million decrease related to a euro denominated term loan held by the Company. This decrease is partially offset
by a $33 million increase related to foreign exchange on intercompany loans and a $12 million increase related to foreign exchange on foreign currency
earnings, assuming consistent
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