Fair Value Of Financial Instruments

6 Months Ended

Jun. 30, 2012

Fair Value Of Financial Instruments [Abstract]

Fair Value Of Financial Instruments

FAIR VALUES OF ASSETS AND LIABILITIES

ASC 820, Fair Value Measurements, provides a framework for measuring fair value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurement requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs and also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels.

There are three general valuation techniques that may be used to measure fair value, as described below:

(i) Market approach – Uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Prices may be indicated by pricing guides, sale transactions, market trades, or other sources;

(ii) Cost approach – Based on the amount that currently would be required to replace the service capacity of an asset (replacement cost); and

(iii) Income approach – Uses valuation techniques to convert future amounts to a single present amount based on current market expectations about the future amounts (includes present value techniques and option-pricing models). Net present value is an income approach where a stream of expected cash flows is discounted at an appropriate market interest rate.

Financial instruments are considered Level 1 when quoted prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

Financial instruments are considered Level 2 when inputs other than quoted prices are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

Financial instruments are considered Level 3 when their values are determined using price models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. A brief description of the valuation techniques used for our Level 3 assets and liabilities is provided below.

Derivatives

The fair values of our interest rate cap derivatives are valued based on quoted market prices received from bank counterparties and are classified as Level 2.

Our interest rate swaps are not exchange traded but instead trade in over-the-counter markets where quoted market prices are not readily available. The fair value of derivatives is derived using models that use primarily market observable inputs, such as interest rate yield curves and credit curves. Any derivative fair value measurements using significant assumptions that are unobservable are classified as Level 3, which include interest rate swaps whose remaining terms extend beyond market observable interest rate yield curves. The fair value of our interest rate swaps use observable and unobservable inputs within a cash flow model. Those unobservable inputs reflect assumptions regarding expected prepayments, deferrals, delinquencies and charge-offs of the loans within the finance receivable portfolio. The cash flow model produces an estimated amortization schedule of the finance receivables which is the basis for the calculation of the series of expected payments and receipts that derive the fair value of the interest rate swaps. The series of payments are calculated and discounted using observable interest rate yield curves. The counterparties’ non-performance risk to the derivative trades is also considered when measuring the fair value of the derivatives. Macroeconomic factors after purchase could negatively affect the credit performance of our portfolio and our counterparties and therefore, could potentially impact the assumptions used in our cash flow model.

Assets and liabilities itemized below were measured at fair value on a recurring basis, using either the market approach (i), the cost approach (ii) or the income approach (iii) as described above:

	June 30, 2012
	(in thousands)
	Fair Value Measurements Using
	Level 1		Level 2		Level 3
	Quoted Prices In Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Assets/ Liabilities At Fair Value
Assets
Money market funds(i)(a)	$	1,542,706					$	1,542,706
Derivatives not designated as hedging instruments:
Interest rate caps(i)			$	2,194			2,194
Interest rate swaps(iii)					$	454	454
Total assets	$	1,542,706	$	2,194	$	454	$	1,545,354
Liabilities
Derivatives designated as hedging instruments:
Interest rate swaps(iii)					$	456	$	456
Derivatives not designated as hedging instruments:
Interest rate caps(i)			$	2,276			2,276
Total liabilities	$	—	$	2,276	$	456	$	2,732

_________________ 

(a) Excludes cash in banks and cash invested in Guaranteed Investment Contracts of $263.0 million.

	December 31, 2011
	(in thousands)
	Fair Value Measurements Using
	Level 1		Level 2		Level 3
	Quoted Prices In Active Markets For Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs		Assets/ Liabilities At Fair Value
Assets
Money market funds(i)(a)	$	1,434,592					$	1,434,592
Derivatives not designated as hedging instruments:
Interest rate caps(i)			$	4,548			4,548
Interest rate swaps(iii)					$	2,004	2,004
Total assets	$	1,434,592	$	4,548	$	2,004	$	1,441,144
Liabilities
Derivatives designated as hedging instruments:
Interest rate swaps(iii)					$	6,440	$	6,440
Derivatives not designated as hedging instruments:
Interest rate caps(i)			$	4,768			4,768
Total liabilities	$	—	$	4,768	$	6,440	$	11,208

_________________ 

(a) Excludes cash in banks and cash invested in Guaranteed Investment Contracts of $252.7 million.

The tables below present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2012 (in thousands):

	Assets			Liabilities
	Interest Rate Swap Agreements			Interest Rate Swap Agreements
Balance at April 1, 2012	$	1,786		$	(2,125	)
Total realized and unrealized gains
Included in earnings	11			(52		)
Included in other comprehensive income				42
Settlements	(1,343		)	1,679
Balance as of June 30, 2012	$	454		$	(456	)

	Assets			Liabilities
	Interest Rate Swap Agreements			Interest Rate Swap Agreements
Balance at January 1, 2012	$	2,004		$	(6,440	)
Total realized and unrealized gains
Included in earnings	139			(92		)
Included in other comprehensive income				(55		)
Settlements	(1,689		)	6,131
Balance as of June 30, 2012	$	454		$	(456	)

The tables below present a reconciliation for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2011 (in thousands):

	Assets			Liabilities
	Interest Rate Swap Agreements			Interest Rate Swap Agreements
Balance at April 1, 2011	$	17,713		$	(33,767	)
Total realized and unrealized gains
Included in earnings	138			1,126
Included in other comprehensive income				(1,736		)
Settlements	(5,274		)	10,657
Balance as of June 30, 2011	$	12,577		$	(23,720	)

	Assets			Liabilities
	Interest Rate Swap Agreements			Interest Rate Swap Agreements
Balance at January 1, 2011	$	23,058		$	(46,797	)
Total realized and unrealized gains
Included in earnings	53			237
Included in other comprehensive income				(852		)
Settlements	(10,534		)	23,692
Balance as of June 30, 2011	$	12,577		$	(23,720	)

FAIR VALUE OF FINANCIAL INSTRUMENTS

Fair values are based on estimates using present value or other valuation techniques in cases where quoted market prices are not available. Those techniques are significantly affected by the assumptions used, including the discount rate and the estimated timing and amount of future cash flows. Therefore, the estimates of fair value may differ substantially from amounts that ultimately may be realized or paid at settlement or maturity of the financial instruments and those differences may be material. Disclosures about fair value of financial instruments exclude certain financial instruments and all non-financial instruments from our disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of our Company.

Estimated fair values, carrying values and various methods and assumptions used in valuing our financial instruments are set forth below (dollars in thousands):

			June 30, 2012				December 31, 2011
		Level	Carrying Value		Estimated Fair Value		Carrying Value		Estimated Fair Value
Financial assets:
Cash and cash equivalents	(a)	1	$	952,091	$	952,091	$	572,297	$	572,297
Finance receivables, net	(b)	3	10,030,657		10,329,962		9,162,492		9,385,851
Restricted cash – securitization notes payable	(a)	1	705,022		705,022		919,283		919,283
Restricted cash – credit facilities	(a)	1	115,396		115,396		136,556		136,556
Restricted cash – other	(a)	1	33,162		33,162		59,136		59,136
Interest rate swap agreements	(d)	3	454		454		2,004		2,004
Interest rate cap agreements purchased	(d)	2	2,194		2,194		4,548		4,548
Financial liabilities:
Syndicated and lease warehouse facilities	(c)	2	308,033		308,033		802,571		802,571
Medium term note facility and Wachovia funding facility	(d)	3	215,202		215,853		296,820		296,542
Securitization notes payable	(d)
Securitization notes payable		1	7,986,457		8,081,380		6,937,841		6,945,865
Private securitization 2012-PP1		3	640,366		650,007
Senior notes	(d)	2	500,000		543,750		500,000		510,000
Convertible senior notes	(d)	2	500		500		500		500
Interest rate swap agreements	(d)	3	456		456		6,440		6,440
Interest rate cap agreements sold	(d)	2	2,276		2,276		4,768		4,768

_________________ 

(a) The carrying value of cash and cash equivalents, restricted cash – securitization notes payable, restricted cash – credit facilities and restricted cash – other is considered to be a reasonable estimate of fair value since these investments bear interest at market rates and have maturities of less than 90 days.

(b) The fair value of the consumer finance receivables is estimated based upon forecasted cash flows on the receivables discounted using a pre-tax weighted average cost of capital. The forecast includes among other things items such as prepayment, defaults, recoveries and fee income assumptions. Substantially all commercial finance receivables have variable rates of interest and maturities of one year. Therefore, carrying value is considered to be a reasonable estimate of fair value.

(c) The syndicated and lease warehouse facilities have variable rates of interest and maturities of approximately one year. Therefore, carrying value is considered to be a reasonable estimate of fair value.

(d) The fair values of the interest rate cap and swap agreements, medium term note facility and Wachovia funding facility, securitization notes payable, senior notes and convertible senior notes are based on quoted market prices, when available. If quoted market prices are not available, the market value is estimated by discounting future net cash flows expected to be settled using a current risk-adjusted rate.

There were no transfers of recurring fair values between levels.

The fair value of our consumer finance receivables use observable and unobservable inputs within a cash flow model. Those unobservable inputs reflect assumptions regarding expected prepayments, deferrals, delinquencies, recoveries and charge-offs of the loans within the portfolio. The cash flow model produces an estimated amortization schedule of the finance receivables which is the basis for the calculation of the series of cash flows that derive the fair value of the portfolio. The series of cash flows are calculated and discounted using a weighted average cost of capital using unobservable debt and equity percentages, an unobservable cost of equity, and an observable cost of debt based on companies with a similar credit rating and maturity profile as our portfolio. Macroeconomic factors could affect the credit performance of our portfolio and therefore, could potentially impact the assumptions used in our cash flow model.

The medium term note facility uses observable and unobservable inputs to estimate fair value. Observable inputs are used regarding an advance rate on the receivables to generate an estimated debt amount as well as the interest rate used to calculate the series of estimated principal payments. Those series of interest payments are discounted using an unobservable interest rate based on the most recent securitization in order to estimate fair value which would approximate the replacement value.

Securitization notes payable uses observable inputs to estimate fair value. Observable inputs are used by obtaining active prices based on the securitization debt issued during the same time frame.

We use observable and unobservable inputs to estimate fair value for the private securitization 2012 - PPI. Unobservable inputs are related to the structuring of the debt into various classes, which is based on public securitizations issued during the same time frame. Observable inputs are used by obtaining active prices based on the securitization debt issued during the same time frame. These observable inputs are then used to create expected market prices (unobservable input), which are then applied to the debt classes in order to estimate fair value which would approximate market value.