Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

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Fair Value Measurements
3 Months Ended
Mar. 31, 2014
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, 2014 and December 31, 2013, only our residual assets, financing receivables held-for-sale and investments available-for-sale, if any, were 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:

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

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.

 

     As of March 31, 2014
     Fair Value      Carrying Value      Level
     (amounts in millions)       

Assets

        

Financing receivables (1)

   $ 401.7       $ 395.5       Level 3

Investments

     92.5         91.3       Level 3

Residual assets

     4.5         4.5       Level 3

Liabilities

        

Credit facility

   $ 117.1       $ 117.1       Level 3

Nonrecourse debt

     157.7         150.7       Level 3

Asset-backed nonrecourse notes

     98.2         98.7       Level 3

 

(1) Financing receivables includes $0.8 million, which represents the net fair value of collateral related to an impaired loan. The allowance for loan losses included in the carrying value of the financing receivables was $11.0 million as of March 31, 2014.

 

     As of December 31, 2013
     Fair Value      Carrying Value      Level
     (amounts in millions)       

Assets

        

Financing receivables (1)

   $ 346.4       $ 347.9       Level 3

Investments

     92.0         92.0       Level 3

Financing receivables and investments held-for-sale

     28.0         28.0       Level 3

Residual assets

     4.9         4.9       Level 3

Liabilities

        

Credit facility

   $ 77.1       $ 77.1       Level 3

Nonrecourse debt

     167.1         159.8       Level 3

Asset-backed nonrecourse notes

     99.8         100.0       Level 3

 

(1) Financing receivables includes $0.8 million, which represents the net fair value of collateral related to an impaired loan. The allowance for loan losses included in the carrying value of the financing receivables was $11.0 million as of December 31, 2013.

Financing Receivables and Investments

The fair value of financing receivables and investments is measured using a discounted cash flow model and Level 3 unobservable inputs. The significant unobservable inputs used in the fair value determination of our financing receivables and investments 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.

 

Credit Facility

The fair values of the credit facility are determined using a discounted cash flow model and Level 3 unobservable inputs. The significant unobservable inputs used in the fair value determination of our 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.

Asset-Backed Nonrecourse Notes and Other Nonrecourse Debt

The fair values of our 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 our 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.

Residual Assets

As of March 31, 2014 and December 31, 2013, we had residual assets, which are included in the securitization assets line item in the condensed consolidated balance sheets, relating to our retained interests in securitized receivables. 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 our residual assets are estimated securitization cash flows, potential default rates and comparable transactions in related assets of public companies. The observable inputs include published U.S government interest rates. 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 the obligors under our underlying assets and our estimates of potential default and prepayment rates, we have used discount rates of 8% to 10% to determine the fair market value of our residual assets. Significant increases in U.S. Treasury rates or default and prepayment rates would, in isolation, 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 our Level 3 assets carried at fair value, which consists of our residual assets:

 

     For the three months ended March 31,  
     2014     2013  
     (amounts in thousands)  

Balance, beginning of period

   $ 4,863      $ 4,638   

Accretion

     150        127   

Collections

     (510     (121

Unrealized loss on residual assets

     (13     (208
  

 

 

   

 

 

 

Balance, end of period

   $ 4,490      $ 4,436   
  

 

 

   

 

 

 

Concentration of Credit Risk

Financial instruments that potentially subject us to concentrations of credit risk are principally cash and cash equivalents. As of March 31, 2014 and December 31, 2013, we had cash deposits held in U.S. banks of $82.6 million and $81.7 million, respectively. Included in these balances are $81.0 million and $80.3 million in bank deposits, respectively, in excess of amounts federally insured.

Financing receivables and investments consist of primarily U.S. 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.