First Data 2008 Annual Report Download - page 101

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company is exposed to market risk from changes in interest rates. The Company's assets include both fixed and floating rate interest-bearing
securities. These investments arise primarily from the Company's sale of payment instruments (principally official checks and money orders). The Company
invests the proceeds from the sale of these instruments, pending the settlement of the payment instrument obligation. The Company has classified these
investments as available-for-sale. Accordingly, they are carried on the Company's Consolidated Balance Sheets at fair market value. A portion of the
Company's Integrated Payment Systems ("IPS") business involves the payment of commissions to selling agents of its official check and money order
products and such commissions are generally computed based on short-term variable rates.
In February 2007, the Company announced its intent to gradually exit the official check and money order businesses. The continued wind-down of this
business resulted in a decrease in its investment portfolio balance as well as a decrease in commissions during the year ended December 31, 2008. As of
December 31, 2008, the vast majority of the long-term instruments associated with these businesses had been converted into short-term taxable investments.
To the extent the IPS business pays commissions based on short-term variable rates to its selling agents and invests the proceeds from the sale of
payment instruments in floating rate or short-term investments, interest rate risk exists related to the relative spreads between different interest rate
indices. Additionally, to the extent there is a fixed rate commission and IPS invests the proceeds from the sale of payment instruments in floating rate or short-
term investments, the IPS business is also subject to interest rate volatility.
The Company's interest rate-sensitive liabilities are its debt instruments. On September 24, 2007, the Company was acquired through a merger with an
entity controlled by affiliates of Kohlberg Kravis Roberts & Co. ("KKR"). As a result of the merger and also on September 24, 2007, the Company
repurchased a majority of its outstanding debt through a tender offer. The interest rate swaps associated with this debt were terminated at the time the debt was
repurchased. On September 24, 2007, the Company issued approximately $22 billion of variable rate debt (though interest rates on $9 billion of the debt was
subject to certain caps) and subsequently swapped $7.5 billion of the senior secured term loan facility to fixed rates. In October 2007, $2.2 billion of the
senior unsecured term loan facility was repaid upon issuance of senior unsecured notes with a fixed rate. In June 2008, the Company entered into agreements
which, among other things and most significantly, amended the interest rates on the senior unsecured term loan facility and the senior subordinated unsecured
term loan facility converting the interest rates on approximately $7 billion in borrowings from variable to fixed. As of December 31, 2008, the Company had
approximately $5.2 billion of variable rate debt not subject to a fixed rate swap.
Using the December 31, 2008 balances, a 10% proportionate increase in short-term interest rates on an annualized basis compared to the interest rates at
December 31, 2008, which for the three month LIBOR was 1.425%, and a corresponding and parallel shift in the remainder of the yield curve, would result in
a decrease to pretax income of $1.4 million. The $1.4 million decrease to pretax income (due to 10% increase in variable rates as of December 31, 2008) is a
combination of the following: a) $7.5 million increase in interest expense related to the Company's balance of variable interest rate debt, net of interest rate
swaps, at December 31, 2008 and b) $6.1 million increase in interest income associated with operating cash balances, settlement related cash balances, and
investment positions (netted with commissions paid to selling agents). Conversely, a corresponding decrease in interest rates would result in a comparable
increase to pretax income. Actual interest rates could change significantly more than 10%. There are inherent limitations in the sensitivity analysis presented,
primarily due to the assumption that interest rate movements are linear and instantaneous. As a result, the analysis is unable to reflect the potential effects of
more complex market changes that could arise, which may positively or negatively affect income.
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