Prudential 2015 Annual Report Download - page 142

PRUDENTIAL FINANCIAL, INC.
Notes to Consolidated Financial Statements
5. VARIABLE INTEREST ENTITIES
In the normal course of its activities, the Company enters into relationships with various special-purpose entities and other entities that
are deemed to be variable interest entities (“VIEs”). A VIE is an entity that either (1) has equity investors that lack certain essential
characteristics of a controlling financial interest (including the ability to control activities of the entity, the obligation to absorb the entity’s
expected losses and the right to receive the entity’s expected residual returns) or (2) lacks sufficient equity to finance its own activities
without financial support provided by other entities, which in turn would be expected to absorb at least some of the expected losses of the
VIE.
If the Company determines that it is the VIE’s “primary beneficiary” it consolidates the VIE. There are currently two models for
determining whether or not the Company is the “primary beneficiary” of a VIE. The first (the “Investment Company Model”) relates to
those VIEs that have the characteristics of an investment company and for which certain other conditions are true. These conditions are that
(1) the Company does not have the implicit or explicit obligation to fund losses of the VIE and (2) the VIE is not a securitization entity,
asset-backed financing entity or an entity that was formerly considered a qualified special-purpose entity. In this model the Company is the
primary beneficiary if it stands to absorb a majority of the VIE’s expected losses or to receive a majority of the VIE’s expected residual
returns.
For all other VIEs, the Company is the primary beneficiary if the Company has (1) the power to direct the activities of the VIE that
most significantly impact the economic performance of the entity and (2) the obligation to absorb losses of the entity that could be
potentially significant to the VIE or the right to receive benefits from the entity that could be potentially significant.
Consolidated Variable Interest Entities
The Company is the investment manager of certain asset-backed investment vehicles commonly referred to as collateralized loan
obligations (“CLOs”) and certain other vehicles for which the Company earns fee income for investment management services, including
certain investment structures in which the Company’s asset management business invests with other co-investors in investment funds
referred to as feeder funds. The Company may sell or syndicate investments through these vehicles, principally as part of the strategic
investing activity of the Company’s asset management businesses. Additionally, the Company may invest in securities issued by these
vehicles. CLOs raise capital by issuing debt securities, and use the proceeds to purchase investments, typically interest-bearing financial
instruments. The Company has analyzed these relationships and determined that for certain CLOs and other investment structures it is the
primary beneficiary and consolidates these entities. This analysis includes a review of (1) the Company’s rights and responsibilities as
investment manager, (2) fees received by the Company and (3) other interests (if any) held by the Company. The assets of these VIEs are
restricted and must be used first to settle liabilities of the VIE. The Company is not required to provide, and has not provided, material
financial or other support to any of these VIEs. Effective January 1, 2016, the Company adopted new guidance that resulted in the
deconsolidation of certain of its previously consolidated CLOs. See Note 2 for additional information.
Additionally, the Company is the primary beneficiary of certain VIEs in which the Company has invested, as part of its investment
activities, but for which it is not the investment manager. These include structured investments issued by a VIE that manages yen-
denominated investments coupled with cross-currency coupon swap agreements thereby creating synthetic dual currency investments. The
Company’s involvement in the structuring of these investments combined with its economic interest indicates that the Company is the
primary beneficiary. The Company has not provided material financial support or other support that was not contractually required to these
VIEs.
140 Prudential Financial, Inc. 2015 Annual Report