First Data 2009 Annual Report Download - page 129

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of December 31, 2009, the Company’s unrealized losses related to the following:
Student loan auction rate securities—The unrealized losses resulted from securities that have decreased in
fair value to below their amortized cost primarily due to the current lack of liquidity resulting from the failure of
the auction mechanisms. During 2008, an other-than-temporary-impairment loss of $48.0 million was recognized
relating to the SLARS under the then applicable accounting guidance in addition to the unrealized loss reflected
in the table directly above. Effective April 1, 2009, in connection with the adoption of new accounting guidance
for recognition and presentation of other-than-temporary impairments, the Company performed an assessment of
the previously impaired SLARS to determine whether the securities were other-than-temporarily-impaired under
the new guidance. The Company does not currently intend to sell the SLARS and does not consider it more likely
than not that it will be required to sell the SLARS before the recovery of their amortized cost basis. This
determination was based on management’s expectation as to when certain related settlement liabilities will need
to be funded and the Company’s ability to use its revolving credit facility in the event the settlement liabilities
need to be funded before the SLARS are liquid.
The Company believes that the SLARS currently held, with the exception of securities issued by
NextStudent, will recover all of their principal value by their maturity date due to the following:
• the securities are comprised primarily of senior tranches;
• the securities are predominantly backed by collateral that is 97%-98% guaranteed by FFELP with
subordinated tranches covering the non-guaranteed portion;
• the securities have loan to collateral value ratios of 99% or greater for all senior securities and 100%
for the subordinated security;
• the securities have above investment grade credit ratings with the majority of securities rated at “A3”
and “A-”or higher with the exception of NextStudent securities which are rated “B3” and “BBB” from
Moody’s and Fitch, respectively.
The Company believes that the NextStudent SLARS may not recover all of their principal value by their
maturity date and that it may incur a credit loss on these securities at least equal to the non-guaranteed portion of
the underlying collateral. Based on the Company’s qualitative assessment of these and other relevant factors,
management concluded that a credit loss should be recognized for the securities issued by NextStudent and no
credit loss should be recognized for all other SLARS. In accordance with the transition guidance prescribed by
the new accounting guidance, as of April 1, 2009, the Company recognized a cumulative effect adjustment by
increasing the opening balance of retained earnings by $27.1 million, net of tax, and recording a corresponding
unrealized loss in OCI on the Consolidated Statement of Equity. The cumulative effect adjustment was equal to
the amount of other-than-temporary-impairment, net of the related tax effects, previously recorded in the
Statement of Operations for these securities less the three percent credit loss for NextStudent (effectively
reversing $43.3 million of impairment expense recognized in 2008 and not associated with SLARS sold during
the first three months of 2009). The amortized cost basis of the securities was increased by the pretax amount of
the cumulative effect adjustment. As of the adoption date of the new accounting guidance discussed above, total
cumulative credit losses of $2.7 million had been recognized in the Statement of Operations on the NextStudent
SLARS. During the year ended December 31, 2009, there were no additional credit losses for any of the SLARS
held.
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