Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v3.7.0.1
Fair Value Measurements
3 Months Ended
Mar. 31, 2017
Fair Value Disclosures [Abstract]  
Fair Value Measurements
3. Fair Value Measurements

Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. The fair value accounting guidance provides a three-level hierarchy for classifying financial instruments. The levels of inputs used to determine the fair value of our financial assets and liabilities carried on the balance sheet at fair value and for those which only disclosure of fair value is required are characterized in accordance with the fair value hierarchy established by ASC 820, Fair Value Measurements. 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. We use our judgment and consider factors specific to the financial assets and liabilities in determining the significance of an input to the fair value measurements. As of March 31, 2017 and December 31, 2016, only our residual assets, financing receivables held-for-sale, interest rate swaps and investments available-for-sale, if any, were carried at fair value on the consolidated balance sheets on a recurring basis. The three levels of the fair value hierarchy are described below:

 

    Level 1—Quoted prices (unadjusted) in active markets that are accessible at the measurement date.

 

    Level 2—Observable prices that are based on inputs not quoted on active markets, but corroborated by market data.

 

    Level 3—Unobservable inputs are used when little or no market data is available.

Unless otherwise discussed below, fair value is measured using a discounted cash flow model, contractual terms and Level 3 unobservable inputs which consist of base interest rates and spreads over base rates which are based upon market observation and recent comparable transactions. An increase in these unobservable inputs would result in a lower fair value and a decline would result in a higher fair value. The financing receivables held for sale are carried at the lower of cost or fair value.

 

     As of March 31, 2017  
     Fair
Value
     Carrying
Value
     Level  
     (dollars in millions)  

Assets

        

Financing receivables

   $ 994      $ 1,013        Level 3  

Investments(1)

     125        125        Level 3  

Securitization residual assets

     22        22        Level 3  

Derivative assets

     1        1        Level 2  

Liabilities

        

Credit facilities

   $ 406      $ 406        Level 3  

Nonrecourse notes(2)

     816        808        Level 3  

 

(1) The amortized cost of our investments as of March 31, 2017, was $128 million.
(2) Fair value and carrying value of nonrecourse notes excludes unamortized debt issuance costs.

 

     As of December 31, 2016  
     Fair
Value
     Carrying
Value
     Level  
     (dollars in millions)  

Assets

     

Financing receivables

   $ 1,017      $ 1,042        Level 3  

Investments(1)

     58        58        Level 3  

Securitization residual assets

     19        19        Level 3  

Derivative assets

     1        1        Level 2  

Liabilities

        

Credit facility

   $ 283      $ 283        Level 3  

Nonrecourse notes(2)

     718        709        Level 3  

 

(1) The amortized cost of our investments as of December 31, 2016, was $61 million.
(2) Fair value and carrying value of nonrecourse notes excludes unamortized debt issuance costs.

Investments

We carry our investments in debt securities at fair value on our balance sheet as investments available-for-sale. The following table reconciles the beginning and ending balances for our Level 3 investments that are carried at fair value on a recurring basis:

 

     For the three months
ended March 31,
 
     2017      2016  
     (dollars in millions)  

Balance, beginning of period

   $ 58      $ 29  

Purchases of investments

     66        21  

Sale of investments

     —          (14

Gains on investments recorded in earnings

     —          1  

Gains (losses) on investments recorded in OCI(1)

     1        —    
  

 

 

    

 

 

 

Balance, end of period

   $ 125      $ 37  
  

 

 

    

 

 

 

 

(1) As of March 31, 2017, approximately $11 million of investment grade rated debt that we held for more than 12 months was in an unrealized loss position of approximately $1 million due to interest rate movements. We have the intent and ability to hold this investment until a recovery of fair value. As of March 31, 2017, we held no other securities in an unrealized loss position for over 12 months

For investments held at fair value, we used a range of interest rate spreads of approximately 1% to 4% based upon comparable transactions both as of March 31, 2017 and December 31, 2016.

 

Interest Rate Swap Agreements

The fair values of the derivative financial instruments are determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. We have determined that the significant inputs, such as interest yield curves and discount rates, used to value our derivatives fall within Level 2 of the fair value hierarchy and that the credit valuation adjustments associated with our counterparties and our own credit risk utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of our or our counterparties default. As of March 31, 2017 and December 31, 2016, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined that the credit valuation adjustments were not significant to the overall valuation of our derivatives. As a result, we determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. The fair values of the derivative financial instruments are included in the other assets or accounts payable, accrued expenses and other line items in the consolidated balance sheets.

Non-recurring Fair Value Measurements

Our financial statements may include non-recurring fair value measurements related to acquisitions and non-monetary transactions, if any. Assets acquired in a business combination are recorded at their fair value. We may use third party valuation firms to assist us with developing our estimates of fair value.

Concentration of Credit Risk

Financing receivables, investments and leases consist primarily of U.S. federal government-backed receivables, investment grade state and local government receivables and receivables from various sustainable infrastructure projects and do not, in our view, represent a significant concentration of credit risk. See Note 6 for an analysis by type of obligor. As described above, we do not believe we have a significant credit exposure to our interest rate swap providers. We had cash deposits that are subject to credit risk as shown below:

 

     March 31,
2017
     December 31,
2016
 
     (dollars in millions)  

Cash deposits

   $ 16      $ 29  

Restricted cash deposits (included in Other assets)

     67        30  
  

 

 

    

 

 

 

Total cash deposits

   $ 83      $ 59  
  

 

 

    

 

 

 

Amount of cash deposits in excess of amounts federally insured

   $ 80      $ 57