Starwood 2010 Annual Report Download - page 137

In June 2009, the Company securitized approximately $181 million of VOI notes receivable (the “2009-A
Securitization”) resulting in cash proceeds of approximately $125 million. The Company retained $44 million of
interests in the QSPE, which included $43 million of notes the Company effectively owned after the transfer and
$1 million related to the interest only strip. The related loss on the 2009-A Securitization of $2 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 2009-A
Securitization were as follows: an average discount rate of 12.8%, an average expected annual prepayment rate
including defaults of 17.9%, and an expected weighted average remaining life of prepayable notes receivable of
52 months. These key assumptions are based on the Company’s historical experience.
In December 2009, the Company securitized approximately $200 million of VOI notes receivable (the
“2009-B Securitization”) resulting in cash proceeds of approximately $166 million. The Company retained
$31 million of interests in the QSPE, which included $22 million of notes the Company effectively owned after
the transfer and $9 million related to the interest only strip. The related gain on the 2009-B Securitization of
$19 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 2009-B
Securitization were as follows: an average discount rate of 7.5%, an average expected annual prepayment rate
including defaults of 24.4%, and an expected weighted average remaining life of prepayable notes receivable of
69 months. These key assumptions are based on the Company’s historical experience.
In December 2009, the Company entered into an amendment with the third-party beneficial interest owner
regarding the notes issued in the 2009-A Securitization (the 2009-A Amendment). The amendment to the terms
included a reduction of the coupon rate and an increase in the effective advance rate. As the increase in the advance
rate produced additional cash proceeds of $9 million, this resulted effectively in additional loans sold to the QSPE
from the original over collateralization. The discount rates used in measuring the fair value of the Retained Interests
at the time of the 2009-A Amendment were 6.5% for the interest only strip and 12.8% for the remaining loans
effectively not sold (unchanged from June 2009). The resulting retained interest was $6 million and resulting loans
effectively owned were $33 million. The related gain on the 2009-A Amendment of $4 million is included in
vacation ownership and residential sales and services in the Company’s consolidated statements of income.
Although the notes effectively owned after the transfers were measured at fair value on the transfer date, they
required prospective accounting treatment as the notes receivable were carried at the basis established at the date of
transfer and accreted interest over time to return to the historical cost basis. During 2009, the Company recorded a
reserve of $4 million related to these loans. As of December 31, 2009, the value of the notes that the Company
effectively owned from the 2009-A Securitization, the 2009-B Securitization and the 2009-A Amendment was
approximately $56 million, which the Company classified as “Other assets” in its consolidated balance sheets.
The Company received aggregate cash proceeds of $21 million and $26 million from the Retained Interests
during 2009 and 2008, respectively. The Company received aggregate servicing fees of $4 million and $3 million
related to these VOI notes receivable during 2009 and 2008, respectively.
At the time of each VOI notes receivable securitization 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. The key
assumptions used in measuring the fair value associated with its note securitizations as of December 31, 2009 was as
follows: an average discount rate of 7.8%, an average expected annual prepayment rate including defaults of 15.8%
and an expected weighted average remaining life of prepayable notes receivable of 86 months.
The fair value of the Company’s Retained Interest as of December 31, 2009 was $25 million with amortized
cost basis of $22 million. Temporary differences in the fair value of the retained interests recorded in other
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STARWOOD HOTELS & RESORTS WORLDWIDE, INC.
NOTES TO FINANCIAL STATEMENTS — (Continued)