Starwood 2006 Annual Report Download - page 103

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The Company had the following commercial commitments outstanding as of December 31, 2006 (in millions):
Total
Less Than
1 Year 1-3 Years 3-5 Years
After
5 Years
Amount of Commitment Expiration Per Period
Standby letters of credit .................. $148 $148 $— $— $—
Hotel loan guarantees
(1)
.................. 51 10 41 — —
Total commercial commitments ............. $199 $158 $41 $— $—
(1) Excludes fair value of guarantees which are reflected in the Company’s consolidated balance sheet.
Variable Interest Entities. Of the over 780 hotels that the Company manages or franchises for third party
owners, the Company has identified approximately 25 hotels that it has a variable interest in. For those ventures in
which the Company holds a variable interest, the Company determined that it was not the primary beneficiary and
such variable interest entities (“VIEs”) should not be consolidated in the Company’s financial statements. The
Company’s outstanding loan balances exposed to losses as a result of its involvement in VIEs totaled $14 million
and $70 million at December 31, 2006 and 2005, respectively. Equity investments and other types of investments
related to VIEs totaled $18 million and $64 million, respectively, at December 31, 2006 and $12 million and
$62 million, respectively, at December 31, 2005.
Guaranteed Loans and Commitments. In limited cases, the Company has made loans to owners of or
partners in hotel or resort ventures for which the Company has a management or franchise agreement. Loans
outstanding under this program, excluding the Westin Boston, Seaport Hotel discussed below, totaled $55 million at
December 31, 2006. The Company evaluates these loans for impairment, and at December 31, 2006, believes these
loans are collectible. Unfunded loan commitments aggregating $29 million were outstanding at December 31,
2006, of which $1 million are expected to be funded in 2007 and $11 million are expected to be funded in total.
These loans typically are secured by pledges of project ownership interests and/or mortgages on the projects. The
Company also has $105 million of equity and other potential contributions associated with managed or joint venture
properties, $23 million of which is expected to be funded in 2007.
During 2004, the Company entered into a long-term management contract to manage the Westin Boston,
Seaport Hotel in Boston, Massachusetts, which opened in June 2006. In connection with this project, the Company
agreed to provide up to $28 million in mezzanine loans and other investments (all of which has been funded) as well
as various guarantees, including a principal repayment guarantee for the term of the senior debt which was capped at
$40 million, a debt service guarantee during the term of the senior debt, which was limited to the interest expense on
the amounts drawn under such debt and principal amortization and a completion guarantee for this project. The fair
value of these guarantees of $3 million is reflected in other liabilities in the accompanying consolidated balance
sheets at December 31, 2006 and 2005. In January 2007 this hotel was sold and the senior debt was repaid in full. As
such, the Company does not expect to fund under these guarantees. In addition, the $28 million in mezzanine loans
and other investments, together with accrued interest, was repaid in full.
Surety bonds issued on behalf of the Company at December 31, 2006 totaled $122 million, the majority of
which were required by state or local governments relating to our vacation ownership operations and by our insurers
to secure large deductible insurance programs.
To secure management contracts, the Company may provide performance guarantees to third-party owners.
Most of these performance guarantees allow the Company to terminate the contract rather than fund shortfalls if
certain performance levels are not met. In limited cases, the Company is obliged to fund shortfalls in performance
levels through the issuance of loans. At December 31, 2006, excluding the Le Méridien management agreement
mentioned below, the Company had six management contracts with performance guarantees with possible cash
outlays of up to $75 million, $50 million of which, if required, would be funded over several years and would be
largely offset by management fees received under these contracts. Many of the performance tests are multi-year
F-42
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)