Starwood 2006 Annual Report Download - page 83

The activity in the allowance for loan losses was as follows (in millions):
Balance at January 1, 2006 .................................................. $22
Provision for loan losses .................................................. 40
Removal of allowance related to notes receivable sold . . .......................... (14)
Write-offs of uncollectible receivables ........................................ (17)
Balance at December 31, 2006 ............................................... $31
Note 10. 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. To accomplish these sales,
the Company transfers a pool of VOI notes receivable to SPEs 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 at arms-length 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 sales in accordance with SFAS No. 140.
With respect to those transactions still outstanding at December 31, 2006, the Company retains economic
interests (the “Retained Interests”) in securitized VOI notes receivables through SPE ownership of QSPE beneficial
interests. 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. 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 and QSPE fixed rate interest
expense. With respect to those transactions still outstanding at December 31, 2006, the Retained Interests are
classified and accounted for as “available-for-sale” securities 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 $15 million, $13 million and $15 million during 2006, 2005, and 2004, 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 annually in 2006, 2005 and 2004, respectively, which amounts are included in vacation ownership and
residential sales and services in 2006 and in gain on sale of VOI notes receivable in 2005 and 2004 in the Company’s
consolidated statements of income. These amounts are excluded from the gain amounts indicated below.
In September 2006, the Company repurchased all of the VOI notes receivables still outstanding ($20 million)
that had been securitized in 2001 for $18 million. In addition, in November 2006 the Company securitized
approximately $133 million of VOI notes receivable (the “2006 Securitization”) resulting in net cash proceeds of
approximately $116 million. In accordance with SFAS No. 152, the related gain of $17 million is included in
vacation ownership and residential sales and services in the Company’s consolidated statements of income.
Key assumptions used in measuring the fair value of the Retained Interests at the time of the 2006
Securitization and at December 31, 2006, relating to the 2006 Securitization, were as follows: discount rate of
10%; annual prepayments, which yields an average expected life of the prepayable VOI notes receivable of
94 months; and expected gross VOI notes receivable balance defaulting as a percentage of the total initial pool of
14.2%. These key assumptions are based on the Company’s experience.
F-22
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)