Starwood 2005 Annual Report Download - page 87

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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
AND STARWOOD HOTELS & RESORTS
NOTES TO FINANCIAL STATEMENTS Ì (Continued)
10%; annual prepayments, which yields an average expected life of the prepayable VOI notes receivable of
99 months; and expected gross VOI notes receivable balance defaulting as a percentage of the total initial pool
of 11.0%. These key assumptions are based on the Company's experience.
During 2004, the Company sold, in several sales, $113 million of VOI notes receivable pursuant to an
arrangement (the ""2004 Purchase Facility'') with third party purchasers. The Company's net cash proceeds
received from these sales were approximately $103 million. Total gains from these sales of $13 million are
included in gain on sale of VOI notes receivable in the Company's statements of income in 2004. As discussed
above, in connection with the 2005 Securitization, the Company repurchased all the remaining receivables
under the 2004 Purchase Facility.
Key assumptions used in measuring the fair value of the Retained Interests at the time of sale at
December 31, 2004 under the 2004 Purchase Facility were as follows: discount rate of 12%; annual
prepayments, which yields an average expected life of the prepayable VOI notes receivable of 99 months; and
expected gross VOI notes receivable balance defaulting as a percentage of the total initial pool of 15.1%. These
key assumptions are based on the Company's experience.
During 2003, the Company securitized $181 million of VOI notes receivable (the ""2003 Securitization'').
The Company's net cash proceeds from this securitization were approximately $63 million. The related gain of
$9 million is included in gain on sale of VOI notes receivable in the Company's statements of income. In
connection with the 2003 Securitization, the Company repurchased all the remaining VOI notes receivable
that had originally been sold in 2002.
Key assumptions used in measuring the fair value of the Retained Interests at the time of the 2003
Securitization and at December 31, 2004, relating to the 2003 Securitization, were as follows: discount rate of
14%; annual prepayments, which yields an average expected life of prepayable notes receivable of 89 months;
and expected gross VOI notes receivable balance defaulting as a percentage of the total initial pool of 17.8%.
At December 31, 2005, the aggregate outstanding principal balance of VOI notes receivable that have
been securitized or sold was $339 million. The delinquent principal amounts of those VOI notes receivables
that were more than 90 days delinquent at December 31, 2005 was approximately $2 million.
At December 31, 2005 and 2004, the Company owned approximately $190 million and $180 million,
respectively, of fixed rate VOI notes receivable, which are included in accounts receivable and other assets in
the Company's balance sheets. The delinquent principal balance of those VOI notes receivables that were
more than 90 days delinquent at December 31, 2005 was approximately $17 million.
Net credit losses for all VOI notes receivable were $10 million, $14 million, and $19 million during 2005,
2004, and 2003, respectively.
The Company received aggregate cash proceeds of $35 million, $32 million and $33 million from the
Retained Interests during 2005, 2004, and 2003, respectively, and aggregate servicing fees of $3 million
annually related to these VOI notes receivable in 2005, 2004, and 2003.
At the time of each receivable sale and at the end of each financial reporting period, the Company
estimates the fair value of its Beneficial Interests using a discounted cash flow model. All assumptions used in
the models are reviewed and updated, if necessary, based on current trends and historical experience.
The Company has completed a sensitivity analysis on the net present value of the Retained Interests to
measure the change in value associated with independent changes in individual key variables. The methodol-
ogy used applied unfavorable changes for the key variables of expected prepayment rates, discount rates and
expected gross credit losses. The aggregate net present value and carrying value of Retained Interests at
December 31, 2005 was approximately $68 million. The decrease in value of the Retained Interests that would
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