First Data 2008 Annual Report Download - page 188

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the U.S. government through the Federal Family Education Loan Program ("FFELP"); and continued to pay interest in accordance with the terms of their
respective security agreements. The NextStudent Master Trust ("NextStudent") securities, also collateralized by securitized student loans substantially
guaranteed by the U.S. government, were downgraded by Moody's on August 28, 2008 from "Aaa" to "Baa3", were further downgraded by Moody's in
January 2009 to "B3", and were downgraded by Fitch in January 2009 from "AAA" to "BBB". This factor was considered in determining the fair value of the
NextStudent securities.
As a result of the failed auctions, the trusts are required to pay maximum interest rates as defined in the security offering documents which are typically
based on either LIBOR or Treasury rates plus a spread.
The Company will not be able to readily access liquidity for the SLARS until the auction market successfully resumes, a secondary market is
established for long-term investors, or issuers redeem the securities. The Company believes that the SLARS held by it will recover substantially all of their
principal value by their maturity date due to the FFELP backing of the underlying collateral; however, the Company currently cannot assert that it has the
intent to hold these securities until they fully recover their par value as it may be willing to sell the securities at a loss if the price exceeds a certain minimum
threshold. In January 2009, the Company sold $11.0 million of par value SLARS to the issuer at the specified minimum threshold. The Company has the
ability and intent to hold these securities for an extended time period and until the securities recover in value at least to the specified minimum threshold. This
ability is based on the projected timing of when certain IPS related settlement liabilities will need to be funded and the ability to use its revolving credit
facility in the event the settlement liabilities need to be funded before the SLARS are liquid. The Company has recognized an other than temporary
impairment loss in 2008 of $48.0 million in "Investment income, net" in the Consolidated Statements of Operations to write down the value of the SLARS to
the specified minimum threshold. Any decline in value of the securities below the specified minimum threshold has been deemed to be temporary and,
accordingly, the Company recognized an additional unrealized loss of $13.3 million in OCI during 2008. The SLARS were reclassified from "Settlement
assets" (part of "Current assets") to "Long-term settlement assets" in the Consolidated Balance Sheet in the first quarter 2008.
Due to the lack of observable market activity for the SLARS held by the Company as of December 31, 2008, the Company with the assistance of a third
party valuation firm, upon which the Company in part relied, made certain assumptions, primarily relating to estimating both the weighted average life for the
securities held by the Company and the impact of the current lack of liquidity on the fair value. At December 31, 2008, the securities were valued based on a
probability weighted discounted cash flow analysis. The Company considered each security's key terms including date of issuance, date of maturity, auction
intervals, scheduled auction dates, maximum auction rate, as well as underlying collateral, ratings, and guarantees or insurance. Substantially all SLARS held
by the Company have collateral backed by FFELP. The probabilities of auction failure, a successful auction at par or repurchase at par for each future period
were then forecasted. The Company assumed that the issuers will continue to pay maximum interest rates on the securities until the event of a successful
auction or repurchase, at which point the Company would sell the SLARS at par through the auction. To determine the fair value of each security, the
weighted average cash flows for each period were discounted back to present value at the determined discount rate for each security. As of December 31,
2008, cumulative probabilities of successfully passing auction have been estimated at approximately 35% through year two, and 80% in year five. The
discount rates used in the valuation were a combination of the liquidity risk premium assigned to the security (which ranged from 5% to 6%) plus the treasury
strip yield (zero coupon treasury bond) for the individual period for which a cash flow was being discounted.
The impact of the Company's judgment in the valuation was significant and, accordingly, the resulting fair value was classified as Level 3 within the
fair value hierarchy. The SLARS were reclassified from Level 2 to Level 3 due to the failure of the auction process.
187