ADT Inc. 10-Q

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Our operations expose us to a variety of market risks, including the effects of changes in interest rates. We monitor and manage these financial exposures as an integral part of our overall risk management program. Our policies allow for the use of specified financial instruments for hedging purposes only. Use of derivatives for speculation purposes is prohibited. 41 Interest Rate Risk We have both fixed-rate and variable-rate debt, and, as a result, we are exposed to fluctuations in interest rates on our debt. We have interest rate swap contracts to hedge our interest rate exposure on our variable-rate debt. However, certain of our variable-rate debt instruments are subject to a 0.75% floor on interest payments while our interest rate swap contracts do not include a floor. If current LIBOR increases above 0.75%, the increase in our debt service obligations on most of our variable-rate indebtedness will be neutralized as we have entered into interest rate swaps that hedge any increase in current LIBOR above 0.75%. If current LIBOR is below 0.75%, even though the amount borrowed remains the same, our net income and cash flows, including cash available for servicing our indebtedness, will decrease by the impact of the difference between 0.75% and current LIBOR because certain of our variable-rate debt has an interest floor of 0.75% while the corresponding interest rate swap contracts do not have a LIBOR floor. The unrealized gains and losses of interest rate swap contracts recognized in interest expense, net, in the Condensed Consolidated Statements of Operations were losses of $14 million and $28 million during the three months ended June 30, 2021 and 2020, respectively, and $92 million gain and a $98 million loss during the six months ended June 30, 2021 and 2020, respectively. As of June 30, 2021, the carrying amount of our debt, excluding finance leases, was $9.5 billion with a fair value of $10.1 billion. In addition, we had interest rate swap contracts with aggregate notional amounts of $3.2 billion with a net liability fair value of $184 million. As of June 30, 2021, a hypothetical 10% change in interest rates would change the fair value of our debt by approximately $167 million based on the implied yield from broker-quoted market prices on our debt, while a similar change in interest rates would change the fair value of our interest rate swap contracts by approximately $2 million based on a discounted cash flow analysis. Additionally, any 0.125% decrease in LIBOR below 0.75% would result in an increase of approximately $4 million in annualized interest expense on our variable-rate debt, including the impact of our interest rate swaps.