First Data 2008 Annual Report Download - page 141

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
certain derivative financial instruments to enhance its ability to manage these risks. The primary risks managed by using derivative instruments are interest
rate risk and foreign exchange risk.
Interest rate swaps are entered into to manage interest rate risk associated with the Company's variable-rate borrowings. Cross currency swaps for
various foreign currencies are entered into to manage foreign exchange risk associated with the Company's initial investments in certain foreign subsidiaries
or certain intercompany loans to foreign subsidiaries. Forward contracts on various foreign currencies are entered into to manage foreign exchange risk
associated with the Company's forecasted foreign currency denominated sales or purchases.
Derivative instruments are entered into for periods consistent with related underlying exposures and do not constitute positions independent of those
exposures. The Company applies strict policies to manage each of these risks, including prohibition against derivatives trading, derivatives market-making or
any other speculative activities. Although certain derivatives do not qualify for hedge accounting, they are entered into for economic hedge purposes and are
not considered speculative.
The Company's policy is to minimize its cash flow and net investment exposures related to adverse changes in interest rates and foreign currency
exchange rates. The Company's objective is to engage in risk management strategies that provide adequate downside protection.
Accounting for Derivative Instruments and Hedging Activities
The Company recognizes all derivatives in the "Other long-term assets" and "Other long-term liabilities" captions in the Consolidated Balance Sheets at
their fair value. In accordance with Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("SFAS No. 133"), the Company designated interest rate swaps as cash flow hedges of forecasted interest rate payments related to its variable rate debt and
certain of the cross currency swaps as a foreign currency hedge of its net investment in a foreign subsidiary. Other cross currency swaps and forward contracts
on various foreign currencies did not qualify or have not been designated as accounting hedges and do not receive hedge accounting treatment.
Two events occurred during 2007 that caused a significant change in the use of derivatives. In February 2007, the Company announced its intent to
gradually exit the official check and money order businesses. As of December 31, 2007, nearly all of the long-term instruments associated with these
businesses were converted into more liquid instruments of shorter duration. In conjunction with the repositioning of the portfolio, the Company terminated all
of the associated interest rate swaps that qualified as fair value hedges of the investments upon sale of the related investments.
As discussed in Note 2 and on September 24, 2007, the Company was acquired through a merger by an entity controlled by affiliates of KKR. As a
result of the merger and also on September 24, 2007, the Company repurchased a majority of its outstanding fixed rate 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 were subject to certain caps) and subsequently swapped $7.5
billion of this variable rate debt to fixed rates.
As of December 31, 2008, the Company uses derivative instruments to mitigate (i) cash flow risks with respect to changes in interest rates (forecasted
interest payments on variable rate debt) and foreign exchange rates (forecasted transactions denominated in foreign currency) and (ii) to protect the initial net
investment in certain foreign subsidiaries and/or affiliates with respect to changes in foreign exchange rates. Not all of these derivatives qualify for hedge
accounting as discussed in more detail below.
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