First Data 2009 Annual Report Download - page 178

FIRST DATA CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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, 2009, cumulative probabilities of principal to
be returned for “AAA” and “Aaa” rated SLARS were estimated at approximately 48% over a two year period
and 89% over a five year period. The probabilities were lower for lower rated securities. The discount rates used
in the valuation were a combination of the liquidity risk premium assigned to the security (which ranged from
4% to 5%) plus the treasury strip yield (zero coupon treasury bond) for the individual period for which a cash
flow was being discounted. The liquidity risk premium on the SLARS has decreased by 100 basis points from
December 31, 2008 due to falling spreads on asset backed securities as well as indications of improved market
liquidity. A 100 basis point change in liquidity risk premium, as well as other factors including default
probability and default recovery rate assumptions, would impact the value of the SLARS by approximately $19
million.
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.
(in millions)
Fair Value Measurement
Using Significant
Unobservable Inputs
(Level 3)
Student loan auction rate
securities
Beginning balance January 1, 2009 .................. $492.2
Total gains or losses (realized or unrealized):
Included in other comprehensive income ...... 12.3
Included in investment income, net .......... (0.5)
Sales and settlements ......................... (54.3)
Transfers in (out) of Level 3 .................... —
Ending balance December 31, 2009 .................. $449.7
Settlement assets- Other available-for-sale securities
As of December 31, 2009, the Company held certain investments in primarily short-term debt securities,
including discounted commercial paper, money market funds and fixed rate corporate bonds. Many of these
securities are considered cash equivalents. Prices for these securities are not quoted on active exchanges but are
priced through an independent third party pricing service based on quotations from market-makers in the specific
instruments or, where appropriate, other market inputs including interest rates, benchmark yields, reported trades,
issuer spreads, two sided markets, benchmark securities, bids, offers, and reference data. In certain instances,
amortized cost is considered an appropriate approximation of market value. The Company’s experience with
these types of investments and expectations of the current investments held is that they will be satisfied at the
current carrying amount. These securities were classified as Level 2.
As of December 31, 2009, the Company held preferred shares issued by the Federal Home Loan Mortgage
Corporation (“Freddie Mac”) that are valued using quoted stock prices from the New York Stock Exchange and
classified as Level 1.
178