First Data 2009 Annual Report Download - page 93

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The Company is exposed to market risk from changes in interest rates. The Company’s assets include both
fixed and floating rate interest-bearing securities. These investments arise primarily from settlement funds held
by the Company associated with the merchant acquiring business and official check business. The Company
invests these funds pending settlement. The Company has classified these investments as available-for-sale.
Accordingly, they are carried on the Company’s Consolidated Balance Sheets at fair market value. A portion of
the Company’s Integrated Payment Systems (“IPS”) business involves the payment of commissions to selling
agents of its official check products and such commissions are generally computed based on short-term variable
rates. The continued wind-down of this business resulted in a decrease in its investment portfolio balance as well
as a decrease in commissions during the year ended December 31, 2009.
The Company’s interest rate-sensitive liabilities are its debt instruments. The Company’s senior secured
term loan facility is subject to variable interest rates. The Company has interest rate swaps on $7.5 billion of the
variable rate debt that convert it to fixed rates. As of December 31, 2009, the Company had approximately $5.1
billion of variable rate debt not subject to a fixed rate swap.
Using the December 31, 2009 balances, a 10% proportionate increase in short-term interest rates on an
annualized basis compared to the interest rates at December 31, 2009, which for the three month LIBOR was
0.2506%, and a corresponding and parallel shift in the remainder of the yield curve, would result in a decrease to
pretax income of $0.5 million. The $0.5 million decrease to pretax income (due to 10% increase in variable rates
as of December 31, 2009) is a combination of the following: a) $1.3 million increase in interest expense related
to the Company’s balance of variable interest rate debt, net of interest rate swaps, at December 31, 2009 and b)
$0.8 million increase in interest income associated with operating cash balances, settlement related cash
balances, and investment positions (netted with commissions paid to selling agents). Conversely, a corresponding
decrease in interest rates would result in a comparable increase to pretax income. Actual interest rates could
change significantly more than 10%. There are inherent limitations in the sensitivity analysis presented, primarily
due to the assumption that interest rate movements are linear and instantaneous. As a result, the analysis is unable
to reflect the potential effects of more complex market changes that could arise, which may positively or
negatively affect income.
Foreign Currency Risk
The Company is exposed to changes in currency rates as a result of its investments in foreign operations,
revenues generated in currencies other than the U.S. dollar and foreign currency denominated loans. Revenue and
profit generated by international operations will increase or decrease compared to prior periods as a result of
changes in foreign currency exchange rates.
A hypothetical uniform 10% weakening in the value of the U.S. dollar relative to all the currencies in which
the Company’s revenues and profits are denominated would result in an increase to pretax income of
approximately $10 million. The increase results from a $107 million increase related to foreign exchange on
intercompany loans and a $14 million increase related to foreign exchange on foreign currency earnings. This
increase is partially offset by a $100 million decrease related to a euro denominated term loan held by the
Company as well as an $11 million decrease related to a euro denominated cross currency swap held by the
Company, assuming consistent operating results as the preceding twelve months from December 31, 2009. There
are inherent limitations in the sensitivity analysis presented, primarily due to the assumption that foreign
exchange rate movements are linear and instantaneous. As a result, the analysis is unable to reflect the potential
effects of more complex market changes that could arise, which may positively or negatively affect income.
Regulatory
Through its merchant alliances, the Retail and Alliance Services segment holds an ownership interest in
several competing merchant acquiring businesses while serving as the electronic processor for those businesses.
In order to satisfy state and federal antitrust requirements, the Company actively maintains an antitrust
compliance program.
93