Starwood 2006 Annual Report Download - page 84

In November 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 VOI notes
receivable sold 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
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 VOI notes receivable sold under the 2004
Purchase Facility.
Key assumptions used in measuring the fair value of the Retained Interests at the time of sale and 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.
At December 31, 2006, the aggregate outstanding principal balance of VOI notes receivable that have been
securitized or sold was $361 million. The principal amounts of those VOI notes receivables that were more than
90 days delinquent at December 31, 2006 was approximately $3 million.
Gross credit losses for all VOI notes receivable were $17 million, $17 million, and $22 million during 2006,
2005, and 2004, respectively.
The Company received aggregate cash proceeds of $36 million, $35 million and $32 million from the Retained
Interests during 2006, 2005, and 2004, respectively, and aggregate servicing fees of $4 million, $3 million and
$3 million related to these VOI notes receivable in 2006, 2005, and 2004, respectively.
At the time of each VOI notes receivable sale and at the end of each financial reporting period, the Company
estimates the fair value of its Retained 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.
At December 31, 2006, the Company 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
methodology 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, 2006 was approximately $51 million. The decreases in value of the Retained Interests that would
result from various independent changes in key variables are shown in the chart that follows (dollar amounts are in
millions). These factors may not move independently of each other.
F-23
STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)