Starwood 2005 Annual Report Download - page 86

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS Ì (Continued)
the 51% interest in the undeveloped land. This gain was offset by a $9 million write down of the value of a
hotel which was formerly operated together with one of the non-core domestic hotels and is now closed and
under review for alternative use and a $2 million charge related to an impairment of an investment.
Note 6. Notes Receivable Securitizations and Sales
From time to time, the Company securitizes or sells, without recourse, its fixed rate VOI notes
receivable. To accomplish these securitizations, the Company transfers a pool of VOI notes receivable to
special purpose entities (together with the special purpose entities in the next sentence, the ""SPEs'') and the
SPEs transfer the VOI notes receivable to qualifying special purpose entities (""QSPEs''), as defined in
SFAS No. 140, ""Accounting for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities Ì a Replacement of FASB Statement No. 125.'' To accomplish these sales, the Company transfers
a pool of VOI notes receivable to special purpose entities and the SPEs transfer the VOI notes receivables to a
third party purchaser. The Company continues to service the securitized and sold VOI notes receivable
pursuant to servicing agreements negotiated on an arms-length basis based on market conditions; accordingly,
the Company has not recognized any servicing assets or liabilities. All of the Company's VOI notes receivable
securitizations and sales to date have qualified to be, and have been, accounted for as SFAS No. 140 sales.
With respect to those transactions still outstanding at December 31, 2005, the Company retains economic
interests (the ""Retained Interests'') in securitized and sold VOI notes receivables through SPE ownership of
QSPE beneficial interests (securitizations) and the right to a deferred purchase price payable by the
purchaser of the sold VOI notes receivable. The Retained Interests, which are comprised of subordinated
interests and interest only strips in the related VOI notes receivable, provides credit enhancement to the third-
party purchasers of the related QSPE beneficial interests (securitizations) and VOI notes receivable (sales).
Retained Interests cash flows are limited to the cash available from the related VOI notes receivable, after
servicing fees, absorbing 100% of any credit losses on the related VOI notes receivable, QSPE fixed rate
interest expense, the third party purchaser's contractual floating rate yield (VOI notes receivable sales), and
program fees (VOI note receivables sales).
Retained Interests relating to pre-2002 securitizations and sales are classified and accounted for as
""trading'' while Retained Interests relating to subsequent securitizations and sales are classified and accounted
for as ""available-for-sale'' securities, respectively, both in accordance with SFAS No. 115 and SFAS No. 140.
The Company's securitization and sale agreements provide the Company with the option, subject to
certain limitations, to repurchase defaulted VOI notes receivable at their outstanding principal amounts. Such
repurchases totaled $13 million, $15 million and $19 million during 2005, 2004, and 2003, respectively. The
Company has been able to resell the VOIs underlying the VOI notes repurchased under these provisions
without incurring significant losses. As allowed under the related agreements, the Company replaced the
defaulted VOI notes receivable under the securitization and sale agreements with new VOI notes receivable,
resulting in net gains of approximately $1 million, $1 million and $6 million in 2005, 2004 and 2003,
respectively, which amounts are included in gain on sale of VOI notes receivable in the Company's statements
of income and are not included in the 2005, 2004 and 2003 gain amounts indicated below.
During 2005, the Company securitized approximately $221 million of VOI notes receivable (the ""2005
Securitization'') resulting in gross cash proceeds of approximately $197 million. The related gain of
$24 million is included in gain on sale of VOI notes receivable in the Company's statements of income. In
connection with the 2005 Securitization, the Company used a portion of the proceeds to repurchase all the
remaining receivables under the 2004 Purchase Facility described below for approximately $64 million.
Key assumptions used in measuring the fair value of the Retained Interests at the time of the 2005
Securitization and at December 31, 2005, relating to the 2005 Securitization, were as follows: discount rate of
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