MoneyGram 2009 Annual Report Download - page 57

Table of Contents
primarily in interest-bearing cash accounts and United States government money market funds. These types of investment have minimal
risk of declines in fair value from changes in interest rates. Our commissions paid to financial institution customers are variable rate,
based primarily on the federal funds effective rate and reset daily. Accordingly, both our investment revenue and our investment
commissions expense will decrease when rates decline and increase when rates rise. However, as commission rates reset more frequently
than our investments, the changes in investment revenue will lag changes in investment commissions expense. In a declining rate
environment, our net investment margin will typically be benefited by this lag, while an increasing rate environment will typically have a
negative impact on our net investment margin. In addition, the investment portfolio and commission interest rates differ, resulting in basis
risk. We do not currently employ any hedging strategies to address the basis risk between our commission rates and our investment
portfolio, nor do we currently expect to employ such hedging strategies. As a result, our net investment margin may be adversely
impacted if changes in the commission rate move by a larger percentage than the yield on our investment portfolio.
In the second quarter of 2008, we repriced our official check product to an average of federal funds effective rate less 85 basis points to
better match our investment commission rate with our lower yield realigned portfolio. In the current environment, the federal funds
effective rate is so low that most of our financial institution customers are in a "negative" commission position, in that we do not owe any
commissions to our customers. While many of our contracts require the financial institution customers to pay us the negative commission
amount, we have opted not to require such payment at this time. As the revenue earned by our financial institution customers from the
sale of our official checks primarily comes from the receipt of their investment commissions from us, the negative commissions reduce
the revenue our financial institution customers earn from our product. Accordingly, our financial institution customers may sharply
reduce their issuances of official checks if the negative commission positions continue. A substantial decline in the amount of official
checks sold would reduce our investment balances, which would in turn result in lower investment revenue for us. As official checks are
still required for many financial transactions, including home closings and vehicle purchases, we believe that risk is naturally mitigated in
part. We continue to assess the potential impact of negative commissions on our official check business. While there are currently no
plans for changes to our business as a result of the negative commissions, we may elect in the future to change some portion of our
compensation structure for select financial institution customers to mitigate the risk of substantial declines in our investment balances.
The Senior Facility is floating rate debt, resulting in decreases to interest expense in a declining rate environment and increases to interest
expense when rates rise. The Company may elect an interest rate for the Senior Facility at each reset period based on the United States
prime bank rate or the Eurodollar rate. For the revolving credit facility and Tranche A, the interest rate is either the United States prime
bank rate plus 250 basis points or the Eurodollar rate plus 350 basis points. As of December 31, 2009 the Company has no outstanding
balance related to the revolving credit facility. For Tranche B, the interest rate is either the United States prime bank rate plus 400 basis
points or the Eurodollar rate plus 500 basis points. Under the terms of the Senior Facility, the interest rate determined using the
Eurodollar index has a minimum rate of 2.50 percent. Through 2008, the Company paid interest using the Eurodollar rate. Effective with
its first interest payment in 2009, the Company elected to use the United States prime bank rate as its basis. Elections are based on the
index which is believed will yield the lowest interest rate until the next reset date. Interest rate risk is managed in part through index
election.
The income statement simulation analysis below incorporates substantially all of our interest rate sensitive assets and liabilities, together
with forecasted changes in the balance sheet and assumptions that reflect the current interest rate environment. This analysis assumes the
yield curve increases gradually over a one-year period. Components of our pre-tax loss which are interest rate sensitive include
"Investment revenue," "Investment commissions expense" and "Interest expense." As a result of the current federal funds rate
environment, the outcome of the income statement simulation analysis on "Investment commissions expense" in a declining rate scenario
is not meaningful as we have no downside risk. In the current federal funds rate environment, the worst case scenario is that we would not
owe any commissions to our financial institution customers as the commission rate would decline to zero or become negative.
Accordingly, we have not presented the impact of the simulation in a declining rate
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