AMD 2008 Annual Report Download - page 126

The Company’s investments in ARS include approximately $123 million of student loan ARS, $32 million
of municipal and corporate ARS and $5 million ARS in preferred shares of closed end mutual funds.
Approximately 81 percent of the Company’s ARS holdings are AAA rated investments and all the $123 million
student loan ARS are guaranteed by the Federal Family Educational Loan Program. Until the first quarter of
2008, the fair values of the Company’s ARS were determinable by reference to frequent successful Dutch
auctions of such securities, which settled at par.
The recent uncertainties in the credit markets have affected all of the Company’s ARS investments and
auctions for these securities have failed to settle on their respective settlement dates. As a result, reliable Level 1
or Level 2 pricing is not available for these ARS. In light of these developments, to determine the fair value for
its ARS, the Company obtained broker reports and discussed with brokers the critical inputs that they used in
their proprietary models to assess fair value, which included liquidity, credit rating and discounted cash flows
associated with these ARS. In addition, the Company performed its own discounted cash flow analyses. Based on
the outcomes of these activities, the Company recorded other than temporary impairment charges of $24 million
during 2008.
The significant inputs and assumptions used by the Company in the discounted cash flow model to
determine the fair value of its ARS, as of December 27, 2008, were as follows:
• The discount rate was determined based on the average one-month LIBOR (2.34%) during the fourth
quarter of 2008, adjusted by 240 basis points (bps) to reflect the current market conditions for
instruments with similar credit quality at the date of valuation. In addition, the discount rate was
adjusted for a liquidity discount of 90 bps to reflect the market risk for these investments that has arisen
due to the lack of an active market.
• The Company assigned an additional credit risk discount of 200 bps to the discount rate for all ARS that
are not backed by the federal government. The total carrying value as of December 27, 2008 of
investments not backed by the federal government was approximately $32 million.
• The Company applied the discount rate over the expected life of 17 years of the estimated cash flows of
the ARS. The projected interest income is based on the future contractual rates set forth in the individual
prospectus for each of the ARS.
In October 2008, UBS AG (UBS) offered to repurchase all of the Company’s ARS that were purchased
from UBS prior to February 13, 2008. In accounting for the put option, the Company made the fair value
accounting election as permitted by SFAS 159. Accordingly, the Company initially recorded the put option at its
estimated fair value as an other asset on the Company’s consolidated balance sheet, with the corresponding gain
recorded in the earnings. Going forward, the put option will be marked to market each quarter, with changes in
its estimated fair value recorded in earnings. The Company’s significant inputs and assumptions used in the
discounted cash flow model to determine the fair value of this put option, as of December 27, 2008, are as
follows:
• The discount rate was determined based on the one-year LIBOR (2.09%), adjusted by 202 basis points
(bps) to reflect the credit risk associated with the UBS put option.
• The Company applied the discount rate over the expected life of 18 months of the estimated cash flows
of the put option. The projected interest income is based on the future contractual rates set forth in the
individual prospectus for each of the ARS that is included in the put option.
If different assumptions were used for the various inputs to the valuation approach including, but not limited
to, assumptions involving the estimated lives of the ARS investments, the estimated cash flows over those
estimated lives, the estimated discount rates applied to those cash flows and the illiquidity factor, the estimated
fair value of these investments and the put option could be significantly higher or lower than the fair value
determined by the Company as of December 27, 2008.
116