First Data 2008 Annual Report Download - page 144

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 2008, the Company entered into basis rate swaps to modify the variable rates on $6.0 billion of the previously executed $7.5 billion interest rate
swaps and to lower the fixed interest rates on those interest rate swaps. The basis swaps pay interest at rates equal to three-month-LIBOR and receive interest
at rates equal to one-month-LIBOR plus a fixed spread. One basis swap with a notional amount of $2.0 billion expires on June 24, 2009 and all other basis
swaps with a combined notional amount of $4.0 billion expire on September 24, 2010. In the second quarter of 2008, the Company also made a corresponding
election on its senior secured term loan facility to change interest payments from three-month-LIBOR to one-month-LIBOR interest rate index on a $6.0
billion principal amount to match the terms of the basis swaps. As a result of entering into basis rate swaps and electing to change the interest payments to
one-month-LIBOR, the Company redefined and re-designated the cash flow hedging relationships. The original three-month-LIBOR interest rate swaps were
re-designated in combination with the basis swaps as cash flows hedges of the variability in the interest payments on the senior secured term loan due to
changes in the LIBOR interest rate. Since the existing derivative instruments were not at zero fair value at the time of re-designation, the re-designated
hedging relationships result in ineffectiveness which is recognized immediately in the Consolidated Statements of Operations.
At December 31, 2008, the maximum length of time over which the Company is hedging its exposure is approximately four years. The effective portion
of changes in fair value of the cash flow hedges is recorded temporarily in the Consolidated Statements of Stockholders' Equity as a component of OCI and
then recognized in the Consolidated Statements of Operations in the same period or periods during which the payment of variable interest associated with the
floating rate debt is recorded in earnings. Any ineffective portions of changes in fair value are recognized in the Consolidated Statements of Operations during
the period of change. The Company follows the hypothetical derivative method to measure hedge ineffectiveness. A $16.0 million loss associated with
ineffectiveness was recognized in earnings during the year ended December 31, 2008 related to the cash flow hedges mostly due to the hedges being off-
market at the time of redesignation. The amount of losses in OCI as of December 31, 2008 related to the hedged transactions that is expected to be reclassified
into the Consolidated Statements of Operations during the 12 months ending December 31, 2009 is approximately $99 million.
In the predecessor periods, the Company entered into derivatives to hedge certain cash flows associated with foreign currency exposures and the
forecasted sale of an investment security. At their initiation, these derivative instruments qualified, and were designated, as cash flow hedges. On an
individual and aggregate basis such derivatives were immaterial to the financial statements for the predecessor periods presented. The amount of
ineffectiveness related to these cash flow hedges was immaterial. These derivative instruments were not redesignated in new hedging relationships at the time
of the merger and, therefore, did not receive hedge accounting treatment in the successor period.
For information on the location and amounts of derivative fair values in the Consolidated Balance Sheets and derivative gains and losses in the
Consolidated Balance Sheets or in the Consolidated Statements of Operations, see the tabular information presented below.
Fair Value Hedges
As discussed above in Note 2 and in connection with the merger in September 2007, the Company terminated the interest rate swaps associated with its
fixed rate debt in connection with the repurchase of the underlying debt. Additionally, the Company terminated the interest rate swaps associated with the
long-term investment portfolio of the official check and money order businesses. These hedges qualified for the short-cut method of accounting as described
in paragraph 68 of SFAS 133. Accordingly, there was no ineffectiveness related to these interest rate swaps. Subsequent to the merger, the Company had no
outstanding fair value hedges that qualified for hedge accounting.
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