Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently serve customers in more than 100 countries, including 51 countries where we operate subsidiaries. These operations expose us to a variety of market risks, including the effects of changes in interest rates and foreign currency exchange rates. These financial exposures are monitored and managed by us as an integral part of our overall risk management program.
We may periodically use various derivative and non-derivative financial instruments, as discussed below, to hedge our interest rate and foreign currency exposures when appropriate. The risk that counterparties to these instruments may be unable to perform is minimized by limiting the counterparties used to major financial institutions with investment grade credit ratings. We do not expect to incur a loss from the failure of any counterparty to perform under the agreements. We do not use derivative financial instruments for purposes other than hedging underlying financial exposures.
The sensitivity analyses discussed below for the market risk exposures were based on the facts and circumstances in effect at December 31, 2024. Actual results will be determined by a number of factors that are not under management’s control and could vary materially from those disclosed.
Interest Rate Risk
We use both fixed and floating rate debt and leases to finance our operations. Floating rate obligations, including both the term loan facility and the revolving credit facility under our senior secured credit facility, expose us to fluctuations in cash flows due to changes in the general level of interest rates. Fixed rate obligations, including our senior unsecured notes, are subject to fluctuations in fair values as a result of changes in interest rates.
Our floating rate debt typically is based on an underlying floating rate component as well as a fixed rate margin component. Based on the contractual interest rates on our floating rate debt at December 31, 2024, a hypothetical 10% increase in rates would increase cash outflows by approximately $6.4 million over a twelve-month period. In other words, the weighted-average interest rate on our floating rate instruments (including any fixed rate margin component) was 6.14% per annum at December 31, 2024. If the underlying floating rate component were to increase by 10%, our average rate on this debt would increase by 0.50 percentage points to 6.64%. The effect on the fair values of our cumulative $1.4 billion of unsecured senior notes of a hypothetical 10% decrease in the yield curve from year-end 2024 levels would result in a $37.7 million increase in the fair value of our unsecured senior notes.
Foreign Currency Risk
We have exposure to the effects of foreign currency exchange rate fluctuations on the results of all of our foreign operations. Our foreign operations generally use local currencies to conduct business, but their results are reported in U.S. dollars.
We are also exposed periodically to the foreign currency rate fluctuations that affect transactions not denominated in the functional currency of our domestic and foreign operations. To mitigate these exposures, we enter into foreign currency forward and swap contracts from time to time. At December 31, 2024, the notional value of our shorter outstanding foreign currency forward and swap contracts was $1,158 million with average contract maturities of approximately one month. These contracts primarily offset exposures in the euro, the Mexican peso, and the British pound. Additionally, these contracts are not designated as hedges for accounting purposes, and accordingly, changes in their fair value are recorded immediately in earnings.
We have entered into cross currency swaps to hedge a portion of our net investments in certain of our subsidiaries with euro functional currency. In July 2022, we terminated the cross currency swap contracts hedging a portion of our net investment in certain euro functional currency subsidiaries and received $67 million in cash for the fair value of the derivative assets at the settlement date. We subsequently entered into new cross currency swaps with a total notional value of $400 million to hedge a portion of our net investments in certain of our subsidiaries with euro functional currency. At December 31, 2024, the notional value of these cross currency swaps contracts was $400 million with a weighted-average remaining maturity of 1.1 years for the cross currency swaps maturing in May 2026 and a remaining weighted average maturity of 5.3 years for the cross currency swaps maturing in April 2031. The effect on the fair value of these cross currency swaps of a hypothetical 10% appreciation in the forward May 2026 euro exchange rate and a hypothetical 10% appreciation in the forward April 2031 euro exchange rate from year-end 2024 levels would result in a $38.2 million change in fair values, changing the December 31, 2024 net liability of $16.1 million to a net liability of $54.3 million.
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The effects of a hypothetical simultaneous 10% appreciation in the U.S. dollar from the 2024 levels against all other currencies of countries in which we have continuing operations are as follows:
(In millions)
Hypothetical Effects
Increase/ (decrease)
Effect on Earnings:
Translation of 2024 earnings into U.S. dollars
$ (49.6)
Transaction gains (losses) (a)
(13.2)
Effect on Other Comprehensive Income (Loss):
Translation of net assets of foreign subsidiaries (a)
(164.0)
(a) Net of outstanding foreign currency swap and forward contracts.
The hypothetical foreign currency effects above detail the consolidated effect attributable to Brink’s of a simultaneous change in the value of a large number of foreign currencies relative to the U. S. dollar. The foreign currency exposure effect related to a change in an individual currency could be significantly different.
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