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 Notes 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 >  12 ASSET SECURITIZATIONS We periodically sell, without recourse, through special purpose entities, notes receivable originated by our Timeshare segment in connection with the sale of timeshare interval and fractional products. We continue to service the notes and transfer all proceeds collected to special purpose entities. We retain servicing assets and other interests in the notes and account for these assets and interests as residual interests. The interests are limited to the present value of cash available after paying financing expenses and program fees and absorbing credit losses. The executed transactions typically include minimal cash reserves established at time of sale as well as default and delinquency triggers, which are monitored on a monthly basis. These special purpose entities are specifically excluded from the scope of FIN 46(R). As such, we have not assessed if we would be deemed the primary beneficiary of these entities and thus be required to consolidated them. Prior to the start of the 2007 fiscal year, we measured servicing assets at the date of sale at their allocated previous carrying amount based on relative fair value, classified those assets as held to maturity under the provisions of FAS No. 115, and recorded those assets at amortized cost. On December 30, 2006, the first day of fiscal year 2007, we adopted FAS No. 156. In conjunction with the adoption of FAS No. 156, we elected to subsequently measure our servicing assets using the fair value method. Under the fair value method, we carry servicing assets on the balance sheet at fair value, and report the changes in fair value, primarily due to changes in valuation inputs and assumptions and to the collection or realization of expected cash flows, in earnings in the period in which the change occurs. To determine the fair value of servicing assets, we use a valuation model that calculates the present value of estimated future net servicing income, which is based on the monthly fee we receive for servicing the securitized notes. We use market assumptions in the valuation model, including estimates of prepayment speeds, default rates, and discount rates. We have inherent risk for changes in the fair value of the servicing asset but do not deem the risk significant and therefore, do not use other financial instruments to mitigate this risk. Effective December 30, 2006, upon the remeasurement of our servicing assets at fair value, we recorded a cumulative-effect adjustment to the 2007 beginning balance of retained earnings of $1 million after-tax ($2 million pretax) in our Consolidated Statements of Shareholders' Equity. Accordingly, servicing assets totaled $11 million at year-end 2006 and $13 million on the first day of fiscal year 2007. At year-end 2008 and year-end 2007, servicing assets totaled $12 million and $15 million, respectively. The table below reconciles the servicing assets balance at year-end 2006, to the beginning balance on December 30, 2006.
The changes in servicing assets for year-end 2007 and year-end 2008, measured using the fair value method were:
Contractually specified servicing fees, late fees, and ancillary fees earned for 2008, 2007, and 2006 totaled $6 million, $6 million, and $5 million, respectively, and were reflected within the changes in fair value to the servicing assets noted above. In 2008, 2007, and 2006, we sold notes receivable originated by our Timeshare segment in connection with the sale of timeshare interval and fractional ownership products of $300 million, $520 million, and $530 million, respectively. The 2008, 2007, and 2006 note sales were made to newly formed trusts that, on the same day, issued $246 million, $520 million, and $530 million of the trust's notes, respectively. In connection with the sale of the notes receivable, we received net proceeds of $237 million in 2008, $515 million in 2007, and $508 million in 2006. We have included gains from the sales of timeshare notes receivable totaling $16 million, net of $12 million of hedge ineffectiveness, in 2008, $81 million in 2007, and $77 million in 2006 within the "Timeshare sales and services" revenue caption in our Consolidated Statements of Income. Our maximum exposure to loss as a result of our involvement with these special purpose entities is the value of our residual interests and servicing assets. We had residual interests of $221 million and $238 million, respectively, at year-end 2008 and year-end 2007, which are recorded in the accompanying Consolidated Balance Sheets as other long-term receivables of $134 million and $157 million, respectively, and other current assets of $87 million and $81 million, respectively. Cash flows between us and third-party purchasers during 2008, 2007, and 2006, were as follows: net proceeds to us from new timeshare note sales of $237 million, $515 million, and $508 million, respectively; repurchases by us of defaulted loans (over 150 days overdue) of $56 million, $30 million, and $24 million, respectively; repurchases by us of other loans in 2006 of $31 million; servicing fees received by us of $6 million, $6 million, and $5 million, respectively; and cash flows received from our retained interests of $96 million, $100 million, and $91 million, respectively. At year-end 2008, $1,181 million of principal remained outstanding in 12 special purpose entities formed in connection with our timeshare note sales. Delinquencies of more than 90 days at year-end 2008 amounted to $12 million. The impact to us from delinquencies is limited to our residual interests, which we value based on a discounted cash flow model, as discussed in Footnote No. 5, "Fair Value Measurements." In cases where we choose to repurchase defaulted loans, we have been able to resell timeshare units underlying the defaulted loans without incurring material losses. See our discussion regarding asset securitizations in the "Cash from Operations" caption of the "Liquidity and Capital Resources" section of this report and, also, see Footnote No. 5, "Fair Value Measurements," in this report for further discussion of our servicing assets and residual interests. Due to the deterioration in the credit markets during the fourth quarter of 2008, we decided to postpone our planned note sale until 2009. > Back to top of page |
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