filings.toolsItem 7A. Quantitative and Qualitative Disclosures About Market Risk
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk primarily from changes in interest rates and foreign currency exchange rates, which may affect future income, cash flows and the fair value of the Company, depending on changes to interest rates or foreign currency exchange rates. In certain situations, we may seek to reduce cash flow volatility associated with changes in interest rates and foreign currency exchange rates by entering into derivative financial instruments intended to provide a hedge against a portion of the risks associated with such volatility. We continue to have exposure to such risks to the extent they are not hedged. We enter into derivative financial instruments to the extent they meet the objectives described above, and we do not use derivatives for trading or speculative purposes.
Interest Rate Risk
We are exposed to interest rate risk on our variable-rate debt. We are most vulnerable to changes in one-month LIBOR, as the interest rate on our variable-rate debt is based on this index. We use interest rate swaps in order to maintain an appropriate level of exposure to interest rate variability. As of December 31, 2019, we held interest rate swaps through which we receive one-month LIBOR and pay a fixed rate on a portion of the Term Loans. We elected to designate these interest rate swaps as cash flow hedges for accounting purposes.
The following table sets forth the contractual maturities and the total fair values as of December 31, 2019 for our financial instruments that are materially affected by interest rate risk, including long-term debt and an interest rate swap. For long-term debt, the table presents contractual maturities and related weighted average interest rates. For the interest rate swap, the table presents the notional amount and weighted average interest rate by contractual maturity date. Fixed rates are the weighted average actual rates, and variable rates are the weighted average market rates prevailing as of December 31, 2019:
| Maturities by Period | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Carrying Value | Fair Value | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions, excluding interest rates) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Long-term debt: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fixed-rate long-term debt(1)(2) | $ | — | $ | — | $ | — | $ | — | $ | 988 | $ | 3,953 | $ | 4,941 | $ | 5,230 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted average interest rate | 4.78 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Variable-rate long-term debt(2) | $ | — | $ | — | $ | — | $ | — | $ | 195 | $ | 2,595 | $ | 2,790 | $ | 2,834 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Weighted average interest rate | 3.50 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest rate swap: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Variable to fixed(3)(4) | $ | — | $ | — | $ | 1,600 | $ | — | $ | — | $ | — | $ | 1,600 | $ | 15 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Variable interest rate payable(5) | 1.79 | % | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Fixed interest rate receivable(6) | 1.98 | % |
(1)Excludes finance lease liabilities with a carrying value of $245 million and debt of consolidated VIEs with a carrying value of $17 million as of December 31, 2019.
(2)Carrying value includes unamortized deferred financing costs and discount.
(3)The carrying value balance reflects the notional amount. We measure our derivative instruments at fair value and, as of December 31, 2019, this interest rate swap was in a liability position.
(4)Excludes an interest rate swap agreement with a notional amount of $1.6 billion, which swaps one-month LIBOR on the Term Loans to a fixed rate of 3.03 percent, with a term for the period from March 2022 to March 2023. The interest rate swap had a liability fair value of $22 million as of December 31, 2019.
(5)Represents the estimated interest rate payable.
(6)Represents the estimated interest rate receivable.
Refer to Note 11: "Fair Value Measurements" in our consolidated financial statements for additional information on the fair value measurements of our derivatives and financial assets and liabilities.
Foreign Currency Exchange Rate Risk
We conduct business in various currencies and are exposed to earnings and cash flow volatility associated with changes in foreign currency exchange rates. Our principal exposure results from management and franchise fees earned in foreign currencies and revenues from our international leased hotels, partially offset by foreign operating expenses. The value of these revenues and expenses could change materially in reference to the functional currencies of the exposed entities and to our reporting currency, USD. We also have exposure from our international financial assets and liabilities, including certain
intercompany loans not deemed to be permanently invested, the value of which could change materially in reference to the functional currencies of the exposed entities. As of December 31, 2019, our largest net exposures were to AUD and EUR.
We use forward contracts designated as cash flow hedges to offset exposure from foreign currency exchange rate risks associated with our management and franchise fees denominated in certain foreign currencies. We use forward contracts not designated as hedging instruments to offset exposure to foreign currency exchange rate fluctuations in certain cash and intercompany loan balances. We do not consider the fair value of earnings effect of these forward contracts to be material to our consolidated financial statements.
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