First Data 2012 Annual Report Download - page 55

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
official check business and merchant acquiring 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. The continued wind-down of the official check business resulted in a decrease in its investment portfolio balance during
the year ended December 31, 2012.
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 $5.0 billion of the variable rate debt that convert it to fixed
rates that expire in September 2016. In addition, the Company has a fixed to floating interest rate swap with a notional value of $750
million expiring in June 2019, to maintain its ratio of fixed to floating rate debt. Therefore, as of December 31, 2012, the Company
had approximately $4.1 billion of variable rate debt that is not subject to a fixed rate swap and includes the fixed to floating interest
rate swap.
Using the December 31, 2012 balances, a 10% proportionate increase in short-term interest rates on an annualized basis
compared to the interest rates as of December 31, 2012, which for the three month LIBOR was 0.3060%, 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 a 10% increase in variable rates as of December 31, 2012) is a combination of the following: a) $1.1
million increase in interest expense related to the Company’s balance of variable interest rate debt, net of interest rate swaps, and b)
$0.6 million increase in interest income associated with operating cash balances, settlement related cash balances, and investment
positions. 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 a decrease to pretax income of approximately $0.2 million. The decrease results
from an $80.1 million decrease related to a euro-denominated term loan held by the Company as well as a $12.2 million decrease
related to three euro-denominated cross-currency swaps held by the Company, assuming consistent operating results as the twelve
months preceding December 31, 2012. This decrease is partially offset by a $77.3 million increase related to foreign exchange on
intercompany loans and a $14.8 million increase related to foreign exchange on foreign currency earnings. 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.
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