HR Block 2006 Annual Report Download - page 104

payments on the loans to our consolidated special purpose entity, after the cash received and the new residual interest retained. These new
which we transfer our beneficial interest in Trusts and the loans to a residual interests are classified as available-for-sale securities.
securitization trust. The securitization trust meets the definition of a Available-for-sale residual interests retained from NIM securitizations
QSPE and is therefore not consolidated. The securitization trust issues may also be sold in a subsequent securitization or sale transaction.
bonds, which are supported by the cash flows from the pooled loans, to In connection with the sale of mortgage loans, we provide certain
third-party investors. We retain an interest in the loans in the form of a representations and warranties allowing the purchaser the option of
trading residual interest and, therefore, usually assume the first risk of returning the purchased loans to us under certain conditions. We may
loss for credit losses in the loan pool. As the cash flows of the recognize losses as a result of the repurchase of loans under these
underlying loans and market conditions change, the value of our trading arrangements. We maintain reserves for the repurchase of loans based
residual interests may also change, resulting in potential write-ups or on historical trends. See Item 8, note 16 to our consolidated
impairment of these residual interests. financial statements.
At the settlement of each securitization, we record cash received and Loans totaling $7.8 billion and $6.7 billion were held by the Trusts as
our residual interests. Additionally, we reverse the beneficial interest in of April 30, 2006 and 2005, respectively, and were not recorded on our
Trusts. The resulting residual interests are classified as trading consolidated balance sheets. In August 2005, the Financial Accounting
securities. See Item 8, note 1 to our consolidated financial statements Standards Board (FASB) issued an exposure draft which amends
for our methodology used in valuing our residual interests. Statement of Financial Accounting Standards No. 140, ‘‘Accounting for
To accelerate the cash receipts from our residual interests, we Transfers and Servicing of Financial Assets and Extinguishments of
securitize the majority of our trading residual interests in net interest Liabilities.’’ This exposure draft seeks to clarify the derecognition
margin (NIM) transactions. In a NIM transaction, the trading residual requirements for financial assets and the initial measurement of
interests are transferred to another QSPE (NIM trust), which then interests related to transferred financial assets that are held by a
issues bonds to third-party investors. The proceeds from the bonds are transferor. Our current off-balance sheet warehouse facilities (the
returned to us as payment for the trading residual interests. The bonds Trusts) in our Mortgage Services segment would be required to be
are secured by these pooled residual interests and are obligations of the consolidated in our financial statements based on the provisions of the
NIM trust. We retain a subordinated interest in the NIM trust, and exposure draft. We will continue to monitor the status of the exposure
receive cash flows on our residual interest generally after the NIM draft. The final standard for this exposure draft is scheduled to be
bonds issued to the third-party investors are paid in full. issued in the first quarter of calendar year 2007.
At the settlement of each NIM transaction, we remove the trading
residual interests sold from our consolidated balance sheet and record
COMMERCIAL PAPER ISSUANCE
We participate in the U.S. and Canadian commercial paper (CP) markets funding of our participation interests in RALs. No CP was outstanding at
to meet daily cash needs. CP is issued by BFC and Block Canada, April 30, 2006 or 2005.
wholly-owned subsidiaries of the Company. The following chart U.S. CP issuances are supported by $2.0 billion in unsecured
provides the debt ratings for BFC as of April 30, 2006: committed lines of credit (CLOCs), which mature in August 2010 and
have an annual facility fee of eight and one-half basis points per annum.
Short-term Long-term Outlook
These lines are subject to various affirmative and negative covenants,
Fitch F1 A Negative
including a minimum net worth covenant.
Moody’s P2 A3 Stable
We obtained an additional $900.0 million line of credit for the period
S&P A2 BBB+ Stable
of January 3 to February 24, 2006 to back-up peak commercial paper
DBRS R-1 (low) A Stable
issuance or use as an alternate source of funding for RAL participations.
The following chart provides the debt ratings for Block Canada as of This line is subject to various covenants, substantially similar to the
April 30, 2006: primary CLOCs.
These facilities were undrawn at April 30, 2006. There are no rating
Short-term Long-term Outlook
contingencies under the CLOCs.
DBRS R-1 (low) A Stable
The Canadian issuances are supported by a credit facility provided by
We use capital primarily to fund working capital requirements, pay one bank in an amount not to exceed $225.0 million (Canadian). The
dividends, repurchase our shares and acquire businesses. Commercial Canadian CLOC is subject to annual renewal in December 2006. This
paper borrowings peaked at $2.3 billion in February 2006 related to CLOC was undrawn at April 30, 2006.
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H&R BLOCK 2006 Form 10K