First Data 2013 Annual Report Download - page 56

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
The Company is exposed to market risk from changes in interest rates. The Company’s assets include cash equivalents as well as both fixed and
floating rate interest-bearing securities. These investments arise primarily from settlement funds held by the Company pending settlement. The continued
wind-down of the official check business resulted in a decrease in its investment portfolio balance during the year ended December 31, 2013.
The Company’s interest rate-sensitive liabilities are its debt instruments. The Company’s senior secured term loan facility is subject to variable interest
rates. The Company has interest rate swaps on $5.0 billion of the variable rate debt that convert it to fixed rates that expire in September 2016. In addition, the
Company has a fixed to floating interest rate swap with a notional value of $750 million expiring in June 2019, to maintain its ratio of fixed to floating rate
debt. Therefore, as of December 31, 2013, the Company had approximately $4.0 billion of variable rate debt that is not subject to a fixed rate swap and
includes the fixed to floating interest rate swap.
Using the December 31, 2013 balances, a 10% proportionate increase in short-term interest rates on an annualized basis compared to the interest rates as
of December 31, 2013, which for the three month LIBOR was 0.2461%, and a corresponding and parallel shift in the remainder of the yield curve, would
result in a decrease to pretax income of $0.6 million. The $0.6 million decrease to pretax income (due to a 10% increase in variable rates as of December 31,
2013) is a combination of the following: a) $1.0 million increase in interest expense related to the Company’s balance of variable interest rate debt, net of
interest rate swaps, and b) $0.4 million increase in interest income associated with operating cash balances, settlement related cash balances, and investment
positions. Conversely, a corresponding decrease in interest rates would result in a comparable increase to pretax income. 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.

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 January 2013, the Company’s cross-currency swap with an aggregate notional value of 69.6 million euro expired. In February 2013, the Company
incurred $258 million in new term loans of which a portion of the cash proceeds were used to repay all of its outstanding euro-denominated term loan
borrowings maturing in 2014 and to pay related fees and expenses. The combined effect of these transactions materially impacted the Company’s pretax
income exposure to market risk from foreign currency. During the first quarter of 2013, the Company entered into cross-currency swaps with aggregate
notional values of 100.0 million Australian dollars and 200.0 million euro that were designated as hedges of net investments in foreign operations. During the
third quarter of 2013, the Company entered into cross-currency swaps with aggregate notional values of 100.0 million British pounds and 75.0 million
Canadian dollars that were designated as hedges of net investments in foreign operations. As of December 31, 2013 and 2012, the company held a cross-
currency swap with an aggregate notional value of 115.0 million Australian dollars that was designated as a hedge of a net investment in a foreign operation.
The swap expires in April 2014. Changes in the fair value of these net investment hedges are recorded as part of the cumulative translation adjustment in other
comprehensive income (“OCI”).
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 an increase to pretax income of approximately $21.8 million. The increase results from a $76.2 million increase related to foreign
exchange on intercompany loans and an $18.9 million increase related to foreign exchange on foreign currency earnings, assuming consistent operating results
as the twelve months preceding December 31, 2013. This increase is partially offset by a $70.1 million decrease related to a euro-denominated term loan held
by the Company as well as a $3.2 million decrease related to two euro-denominated cross-currency swaps held by the Company. There are inherent limitations
in the sensitivity analysis presented, primarily due to the assumption that foreign exchange 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.

Through its merchant alliances, the Retail and Alliance Services segment holds an ownership interest in several competing merchant acquiring
businesses while serving as the electronic processor for those businesses. In order to satisfy state and federal antitrust requirements, the Company actively
maintains an antitrust compliance program.
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