Western Union 2011 Annual Report Download - page 89

As of December 31, 2011, we had $300.0 million of floating notes, which had an effective interest rate of
1.11% or 58 basis points above three-month LIBOR. Additionally, $500.0 million of our total $3.6 billion of
fixed-rate borrowings at par value are effectively floating rate debt through interest rate swap agreements,
changing this fixed-rate debt to LIBOR-based floating rate debt, with weighted-average spreads of approximately
600 basis points above LIBOR. Borrowings under our commercial paper program mature in such a short period
that the financing is effectively floating rate. Commercial paper borrowings of $297.0 million were outstanding
as of the year ended December 31, 2011. Our commercial paper borrowings as of December 31, 2011 had a
weighted-average annual interest rate of approximately 0.6% and a weighted-average term of 9 days. During the
year ended December 31, 2011, the average commercial paper balance outstanding was $89.7 million and the
maximum balance outstanding was $784.1 million.
We review our overall exposure to floating and fixed rates by evaluating our net asset or liability position in
each, also considering the duration of the individual positions. We manage this mix of fixed versus floating
exposure in an attempt to minimize risk, reduce costs and improve returns. Our exposure to interest rates can be
modified by changing the mix of our interest-bearing assets as well as adjusting the mix of fixed versus floating
rate debt. The latter is accomplished primarily through the use of interest rate swaps and the decision regarding
terms of any new debt issuances (i.e., fixed versus floating). We use interest rate swaps designated as hedges to
increase the percentage of floating rate debt, subject to market conditions. As of December 31, 2011, our
weighted-average effective rate was approximately 4.8%.
A hypothetical 100 basis point increase/decrease in interest rates would result in a decrease/increase to pre-tax
income of approximately $11 million and $12 million annually based on borrowings on December 31, 2011 and
2010, respectively, that are sensitive to interest rate fluctuations. The same 100 basis point increase/decrease in
interest rates, if applied to our cash and investment balances on December 31, 2011 and 2010 that are sensitive to
interest rate fluctuations, would result in an offsetting benefit/reduction to pre-tax income of approximately $18
million and $25 million annually, respectively. There are inherent limitations in the sensitivity analysis
presented, primarily due to the assumption that interest rate changes would be instantaneous. As a result, the
analysis is unable to reflect the potential effects of more complex market changes, including changes in credit
risk regarding our investments, which may positively or negatively affect income. In addition, the current mix of
fixed versus floating rate debt and investments and the level of assets and liabilities will change over time. We
will also be further impacted by changes to future interest rates as we refinance our debt or by reinvesting
proceeds from the sale or maturity of our investments.
Credit Risk
Our interest earning assets include investment securities, substantially all of which are highly-rated state and
municipal debt securities, which are classified in “Settlement assets” and accounted for as available-for-sale
securities, and money market fund investments, which are classified in “Cash and cash equivalents.” The
majority of our investment securities had credit ratings of “AA–” or better from a major credit rating agency.
To manage our exposures to credit risk with respect to investment securities, money market investments,
derivatives and other credit risk exposures resulting from our relationships with banks and financial institutions,
we regularly review investment concentrations, trading levels, credit spreads and credit ratings, and we attempt to
diversify our investments among global financial institutions. We also limit our investment level in any
individual money market fund to no more than $100 million.
We are also exposed to credit risk related to receivable balances from agents in the money transfer, walk-in
bill payment and money order settlement process. In addition, we are exposed to credit risk directly from
consumer transactions particularly through our Internet services and electronic channels, where transactions are
originated through means other than cash, and therefore are subject to “chargebacks,” insufficient funds or other
collection impediments, such as fraud. We perform a credit review before each agent signing and conduct
periodic analyses.
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