Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
Foreign Currency Risk
Our exposure to
foreign currency exchange rate fluctuations is primarily the result of foreign subsidiaries primarily domiciled in Europe and Canada. We use financial derivative instruments to hedge foreign currency exchange rate risks associated with our Canadian
subsidiary.
The assets and liabilities of our international subsidiaries, whose functional currencies are primarily the Canadian dollars,
British pounds and euros, respectively, are translated into U.S. dollars at exchange rates in effect at the balance sheet date. Income and expense items are translated at the average exchange rates prevailing during the period. The cumulative
translation effects for subsidiaries using a functional currency other than the U.S. dollar are included in accumulated other comprehensive loss as a separate component of stockholders equity. We estimate that had the exchange rate in each
country unfavorably changed by ten percent relative to the U.S. dollar, our consolidated income before taxes would have decreased by approximately $2.6 million for the year ended December 31, 2020.
Interest Rate Risk
Prior to the
Transaction, interest rate exposure related primarily to the effect of interest rate changes on borrowings outstanding under our AR Facility, Revolving Credit Facility, First Lien Term Loans, and Second Lien Term Loans.
Subsequent to the Transactions, interest rate exposure relates primarily to the effect of interest rate changes on borrowings outstanding
under the New Term Loan Facility, New Revolving Credit Facility and Notes. As of the closing of the Transactions, we drew $100.0 million on the New Revolving Credit Facility, which was subject to an assumed interest rate of 2.75%. Additionally,
we borrowed an aggregate principal amount of $1.325 billion on the New Term Loan Facility, which are subject to an assumed interest rate of 6.0% and $775.0 million in Notes, which is subject to a fixed interest rate of 6.5%.
We manage our interest rate risk through the use of derivative financial instruments. Specifically, we have entered into interest rate cap
agreements to manage our exposure to potential interest rate increases that may result from fluctuations in LIBOR. We do not designate these derivatives as hedges for accounting purposes, and as a result, all changes in the fair value of
derivatives, used to hedge interest rates, are recorded in Interest expense, net in our Consolidated Statements of Operations and Comprehensive Loss.
As of December 31, 2020, we had interest rate cap contracts on $1.5 billion of notional value of principal from various financial
institutions, with a maturity dates of January 24, 2022 to manage our exposure to interest rate movements on variable rate credit facilities when three-months LIBOR on term loans exceeds caps ranging from 3.25% to 3.50%. The aggregate fair
value of our interest rate caps represented an outstanding net liability of $1.9 million as of December 31, 2020.
In addition,
we had interest rate cap contracts on an additional $650.0 million of notional value of principal from other financial institutions, with a maturity date of December 16, 2024 to manage our exposure to interest rate movements on variable
rate credit facilities when one-month LIBOR on term loans exceeding a cap of 0.75%. The aggregate fair value of our interest rate caps represented an outstanding net asset of $1.8 million as of
December 31, 2020.
Holding other variables constant, a change of one-eighth percentage point
in the weighted average interest rate on the New Term Loan Facility and New Revolving Credit Facility would have resulted in an increase of $1.3 million in interest expense, net of gains from interest rate caps, for the year ended
December 31, 2020.
In the future, in order to manage our interest rate risk, we may refinance our existing debt, enter into
additional interest rate cap agreements or modify our existing interest rate cap agreement. However, we do not intend or expect to enter into derivative or interest rate cap transactions for speculative purposes.
67
Table of Contents