First Data 2009 Annual Report Download - page 131

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company formally documents all relationships between hedging instruments and the underlying hedged
items, as well as its risk management objective and strategy for undertaking various hedge transactions. This
process includes linking all derivatives that are designated as cash flow hedges to forecasted transactions and net
investment hedges to the underlying investment in a foreign subsidiary or affiliate. The Company formally
assesses, both at inception of the hedge and on an ongoing basis, whether the hedge is highly effective in
offsetting changes in cash flows or foreign currency exposure of the underlying hedged items. The Company also
performs an assessment of the probability of the forecasted transactions on a periodic basis. If it is determined
that a derivative ceases to be highly effective during the term of the hedge or if the forecasted transaction is no
longer probable, the Company will discontinue hedge accounting prospectively for such derivative.
Credit Risk
The Company is monitoring the financial stability of its derivative counterparties. Certain of these
counterparties received support from the federal government in the recent past due to difficult financial
conditions. Although these counterparties remain highly-rated (in the “A” category or higher), their ability to
satisfy their commitments may be dependent on receiving continued support from the federal government.The
credit risk inherent in these agreements represents the possibility that a loss may occur from the nonperformance
of a counterparty to the agreements. The Company performs a review at inception of the hedge, as circumstances
warrant, and at least on a quarterly basis of the credit risk of these counterparties. The Company also monitors
the concentration of its contracts with individual counterparties. The Company’s exposures are in liquid
currencies (primarily in U.S. dollars, euros and Australian dollars), so there is minimal risk that appropriate
derivatives to maintain the hedging program would not be available in the future.
DERIVATIVES NOT QUALIFYING FOR HEDGE ACCOUNTING
At December 31, 2009, the Company had certain derivative instruments that functioned as economic hedges
but no longer qualify or were not designated to qualify for hedge accounting. Such instruments included a cross-
currency swap to hedge foreign currency exposure from an intercompany loan, cross-currency swaps to hedge an
investment in a foreign subsidiary from fluctuations in foreign currency exchange rates, a foreign exchange rate
collar to hedge foreign currency exposure related to an outsourcing contract with a foreign vendor, and interest
rate swaps to hedge the interest payments on variable rate debt from fluctuations in interest rates. During the
third quarter of 2009, the Company settled and terminated the Canadian dollar foreign currency forward contracts
that were used to hedge forecasted foreign currency sales in connection with a restructuring of the related sales
contract.
During the first quarter of 2009, one of the cash flow hedges of interest payments on the Company’s
variable rate debt previously designated to qualify for hedge accounting ceased to be highly effective. As such,
the Company did not apply hedge accounting to the discontinued hedge during the first quarter of 2009 and
discontinued prospective hedge accounting for the affected derivatives with a notional balance of $1.5 billion.
During the second quarter of 2009, the Company made an election with respect to the duration of the variable
LIBOR interest rate payments it was hedging which was inconsistent with the original hedge strategy
documented in the accounting designation. Accordingly, the Company had to de-designate the affected interest
rate swaps, with $2 billion notional amount, from receiving hedge accounting. The Company was able to
re-designate prospectively an interest rate swap with a notional amount of $500 million to continue to receive
hedge accounting treatment; however, the other interest rate swaps with $1.5 billion notional amount no longer
met the criteria to qualify for hedge accounting primarily due to the significant “off-market” value of the swaps
and will not be receiving hedge accounting treatment prospectively. While the derivatives no longer qualify for
hedge accounting, they continue to be effective economically in eliminating the variability in interest rate
payments on the corresponding portion of the Company’s variable rate debt.
131