3. Fair Value Measurements

The levels of inputs used to determine fair value of the Predecessor’s financial assets and liabilities investments are characterized in accordance with the fair value hierarchy established by ASC 820. Where inputs for a financial asset or liability fall in more than one level in the fair value hierarchy, the financial asset or liability is classified in its entirety based on the lowest level input that is significant to the fair value measurement of that financial asset or liability. The Predecessor uses its judgment and considers factors specific to the financial assets and liabilities in determining the significance of an input to the fair value measurements. At March 31, 2013 and December 31, 2012, only the Predecessor’s residual interests in securitized receivables and derivatives are carried at fair value on the condensed consolidated balance sheets on a recurring basis. The three levels of the fair value hierarchy are described below:

At March 31, 2013 and December 31, 2012, the Predecessor had an interest rate swap and an interest rate cap relating to its credit facility. The total fair value of the interest rate swap and interest rate cap was $(84,163) and $(103,148) at March 31, 2013 and December 31, 2012, respectively. During the three months ended March 31, 2013 and 2012, an unrealized gain on derivatives of $18,985, and $14,795, respectively, was recorded in net income in the condensed consolidated statements of operations. The valuation was based on Level 2 inputs primarily determined based on the present value of future cash flows using model-derived valuations that use observable inputs such as interest rates and credit spreads. The significant unobservable inputs used in the fair value measurement of the Predecessor’s interest rate swap and interest rate cap are interest rates. Significant increases in interest rates would result in lower unrealized losses on our interest rate swap and cap while decreases in interest rates would result in higher unrealized losses on our interest rate swap and cap.

As of March 31, 2013 and December 31, 2012, the aggregate fair value of financing receivables was $207.6 million and $207.7 million, with a book value of $192.3 million and $191.4 million, respectively. The fair values of financing receivables are measured using a discounted cash flow model and Level 3 inputs. The significant unobservable inputs used in the fair value determination of the Predecessor’s investment in financing receivables are discount rates and interest rates in recent comparable transactions. Significant increases in discount rates and recent comparable transactions would result in a significantly lower fair value. Significant decreases in discount rates and recent comparable transactions in isolation would result in a significantly higher fair value.

At March 31, 2013 and December 31, 2012, the Predecessor had residual assets in the condensed consolidated balance sheets relating to its retained interests in securitized receivables. The fair value of the residual assets was $4,436,199 and $4,638,579 at March 31, 2013 and December 31, 2012, respectively. During the three months ended March 31, 2013 and 2012, an unrealized loss on residual assets of $(208,250) and $(147,486), respectively, was recorded in the condensed consolidated statements of comprehensive loss. Due to the lack of actively traded market data, the valuation of these residual assets was based on Level 3 unobservable inputs. The significant unobservable inputs used in the fair value measurement of the Predecessor’s residual assets are published U.S government interest rates, estimated securitization cash flows, potential default rates and comparable transactions in related assets of public companies. The discount rates considered, based on observations of market participants on other government-issued securitization transactions, range from 7% to 15%. Based on the high credit quality of our underlying assets, potential default and prepayment rates, and the lower risk, we have used discount rates of 8% to 10% to determine the fair market value of our underlying assets. Significant increases in U.S. Treasury rates or default and prepayment rates in isolation would result in a significantly lower fair value measurement. See Note 5 regarding servicing assets and the residual asset sensitivity analysis.

The following table reconciles the beginning and ending balances for residual assets for the three months ended March 31, 2013:

At March 31, 2013 and December 31, 2012, the aggregate fair value of nonrecourse debt was $212.3 million and $212.7 million, with a carrying value of $196.6 million and $196.0 million, respectively. The fair values of nonrecourse debt are determined using a discounted cash flow model and Level 3 inputs. The significant unobservable inputs used in the fair value determination of the Predecessor’s nonrecourse debt are discount rates and interest rates in recent comparable transactions. Significant increases in discount rates would result in a significantly lower fair value. Significant decreases in discount rates and recent comparable transactions in isolation would result in a significantly higher fair value.

At March 31, 2013 and December 31, 2012, the aggregate fair value of the Predecessor’s credit facility was $3.6 million and $4.2 million, with a carrying value of $3.6 million and $4.2 million, respectively. The fair values of the credit facility are determined using a discounted cash flow model and Level 3 inputs. The significant unobservable inputs used in the fair value determination of the Predecessor’s credit facility are discount rates. Significant increases in discount rates would result in a significantly lower fair value. Significant decreases in discount rates in isolation would result in a significantly higher fair value.

The Predecessor’s financial instruments include cash equivalents that are carried at amounts that approximate fair value.

Concentration of Credit Risk

Financial instruments that potentially subject the Predecessor to concentrations of credit risk are principally cash and cash equivalents. At March 31, 2013 and December 31, 2012, the Predecessor had cash deposits held in U.S. banks of $3,371,510 and $8,079,271, respectively. Included in these balances are $2,518,865 and $6,609,045 in bank deposits, respectively, in excess of amounts federally insured.

Financing receivables and direct financing leases are primarily U.S. government-backed receivables and are not a significant concentration of credit risk.