filings.toolsItem 3. Quantitative and Qualitative Disclosures about Market Risk
7K characters. Original on sec.gov · Markdown
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest rate and foreign currency sensitivity
There has been no material change in the nature of the Company's interest rate risks or foreign currency exchange risks from those described in Part II Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2022.
The tables below provide information about our financial instruments that are sensitive to changes in interest rates as of June 30, 2023. For further information on the components of the Company's long-term debt and their interest rates, see Note 7 to the condensed consolidated interim financial statements included in this Quarterly Report on Form 10-Q at Part I Item 1.
| Expected maturity date | Average interest rate | Fair value**(1)** | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Long term debt: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fixed rate | $ | 11 | $ | 34 | $ | 34 | $ | 44 | $ | 31 | $ | 28 | $ | 4,388 | $ | 4,570 | 4.42 | % | $ | 3,623 | |||||||||||||||||||||||||||||||||||||||
| Variable rate | $ | 41 | $ | 82 | $ | 96 | $ | 2,617 | $ | 82 | $ | 1,271 | $ | 1 | $ | 4,190 | 4.92 | % | $ | 4,138 |
(1)Represents the fair value of the Company’s long-term debt excluding financing leases. See Note 7 to the condensed consolidated financial statements for further details.
During and as of the end of the second quarter, the Company transitioned the variable rate base on its senior secured credit facilities and related hedging interest rate caps from LIBOR to SOFR. This transition involved a SOFR-to-LIBOR rate mismatch between this debt and the 2019 interest rate caps for a portion of this quarter, but the Company’s interest rate hedges remained highly effective throughout the transition and thereafter.
The scheduled principal payments for all debt that bears a variable rate by its terms, including all of Term Loan B-1 and Term Loan A-1, have been included on the variable rate line of the schedule of expected maturities above. Additionally, the principal amounts of Term Loan B-1 and Term Loan A-1 have been included in the calculation of the average variable interest rate presented.
However, principal amounts of $2,618 million for Term Loan B-1 and $882 million of Term Loan A-1 (the capped debt) are subject to SOFR caps of 2.00% through June 30, 2024. As of June 30, 2023, applicable SOFR rates were above this 2.00%, making the interest rates on this capped debt “economically fixed", unless or until applicable SOFR rates were to fall back below 2.00% during the remaining term of the caps.
As a result, as of June 30, 2023, total fixed and economically fixed debt was $8,070 million, with an average interest rate of 4.30%, while total variable rate debt not subject to caps was $690 million with an average rate of 8.66%.
See Note 7 for further details on the Company’s interest rate cap agreements.
| Notional amount | Contract maturity date | Fair value | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | Thereafter | Receive variable | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| (dollars in millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 cap agreements | $ | 3,500 | $ | — | $ | 3,500 | $ | — | $ | — | $ | — | $ | — | $ | — | SOFR above 2.00%(1) | $ | 115.0 | ||||||||||||||||||||||||||||||||||||||||
| 2023 cap agreements | $ | 200 | $ | — | $ | 100 | $ | 100 | $ | — | $ | — | $ | — | $ | — | SOFR above 3.75% | $ | 1.9 | ||||||||||||||||||||||||||||||||||||||||
| 2023 cap agreements | $ | 1,000 | $ | — | $ | 250 | $ | 750 | $ | — | $ | — | $ | — | $ | — | SOFR above 4.00%(2) | $ | 10.4 | ||||||||||||||||||||||||||||||||||||||||
| 2023 cap agreements | $ | 800 | $ | — | $ | 400 | $ | 400 | $ | — | $ | — | $ | — | $ | — | SOFR above 3.75% | $ | 7.4 |
(1)As defined in the ISDA IBOR Fallbacks Protocol, LIBOR contracts that qualify as derivative instruments transitioned to a SOFR rate plus credit spread adjustment upon LIBOR cessation on June 30, 2023.
(2)Effective January 1, 2025, the maximum rate of 4.00% decreases to 3.75% for these interest rate caps.
Previous: Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. · Next: Item 4. Controls and Procedures