Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A . Quantitative and Qualitative Disclosures About Market Risk
We may be exposed to interest rate changes primarily as a result of long-term debt used to fund operations and capital expenditures. Our use of derivative instruments is intended to manage our exposure to interest rate movements.
With regard to variable-rate financing, we assess interest rate risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We maintain risk management control systems to monitor interest rate cash flow risk attributable to both our outstanding and forecasted debt obligations, as well as our potential offsetting hedge positions. Our risk management control systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on our future cash flows.
We may use derivative financial instruments to hedge exposures to changes in interest rates. To the extent we do, we are exposed to market and credit risk. Market risk is the adverse effect on the value of the financial instrument that results from a change in interest rates. Market risk associated with derivative instruments is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of the derivative instrument is positive, the counterparty owes us, which creates credit risk to us. The credit risk associated with derivative instruments is managed by entering into transactions with a variety of highly-rated counterparties.
As of December 31, 2022, we had $425.0 million outstanding variable-rate indebtedness which bears interest at a rate equal to the Secured Overnight Financing Rate ("SOFR") plus credit spreads and reference rate adjustments ranging from 114 basis points to 129 basis points. We have interest rate swap agreements on $300.0 million of our variable-rate indebtedness, which effectively convert the base rate on the indebtedness from variable to fixed. If market rates of interest on our variable-rate debt increased or decreased by 100 basis points, the change in annual interest expense on our variable-rate debt would decrease earnings and cash flows by approximately $1.3 million or increase earnings and cash flows by approximately $1.3 million, respectively, after taking into account the impact of the $300.0 million of interest rate swap agreements.
The table below presents the maturity profile, weighted average interest rates and fair value of total debt as of December 31, 2022. The table has limited predictive value as average interest rates for variable-rate debt included in the table represent rates that existed as of December 31, 2022 and are subject to change. Furthermore, the table below incorporates only those exposures that existed as of December 31, 2022 and does not consider exposures or positions that may have arisen or expired after that date. As a result, our ultimate realized gain or loss with respect to interest rate fluctuations will depend on the exposures that arise during future periods, our hedging strategies at that time, and actual interest rates.
(dollars in thousands) 2023 2024 2025 2026 2027 Thereafter
Total
Fair Value
Unsecured Debt
Fixed rate $ — $ 500,000 $ 700,000 $ 607,542 $ 400,000 $ 2,410,911 $ 4,618,453 $ 4,148,681
Weighted average interest rate (1)
3.69 % 3.70 % 3.67 % 3.56 % 3.50 % 3.50 %
Variable rate (2)(3)
$ — $ — $ — $ 125,000 $ 300,000 $ — $ 425,000 $ 425,056
Weighted average interest rate (1)(2)
4.27 % 4.27 % 4.27 % 3.78 % — % — %
(1) Weighted average interest rates include the impact of our interest rate swap agreements and are calculated based on the total debt balances as of the end of each year, assuming the repayment of debt on its scheduled maturity date.
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(2) The interest rates on our variable rate Unsecured Credit Facility are based on credit rating grids. The credit rating grids and all-in-rates on outstanding variable rate debt as of December 31, 2022 are as follows:
Credit Spread Grid
As of December 31, 2022 SOFR Rate Loans Base Rate Loans
Variable Rate Debt SOFR Rate Reference Rate Adjustment Credit Spread (1)
All-in-Rate Credit Spread Credit Spread
Revolving Facility (2)
4.30% 0.10% 1.04% 5.44% 0.83% – 1.50% 0.00% – 0.40%
Term Loan Facility (3)
4.22% 0.10% 1.09% 5.41% 0.90% – 1.70% 0.00% – 0.60%
(1) Our Revolving Facility and Term Loan Facility include a sustainability metric incentive which can reduce the applicable credit spread by up to two basis points. As of December 31, 2022, we qualified for a one basis point reduction to the applicable credit spread, which is included in the credit spreads presented above.
(2) Our Revolving Facility is further subject to a facility fee ranging from 0.13% to 0.30%, which is excluded from the all-in-rate presented above.
(3) Our Term Loan Facility is further subject to a ticking fee on the additional $200.0 million delayed draw of 0.25%, which is excluded from the all-in-rate presented above.
(3) We have in place four interest rate swap agreements that convert the variable interest rate on one variable rate debt instrument to a fixed rate. The balance subject to interest rates swaps as of December 31, 2022 is as follows (dollars in thousands):
As of December 31, 2022
Variable Rate Debt Amount Weighted Average Fixed SOFR Rate Credit Spread Reference Rate Adjustment Swapped All-in-Rate
$300 Million Term Loan $ 300,000 2.59% 1.09% 0.10% 3.78%
Item 8. Financial Statements and Supplementary Data
See the Index to Consolidated Financial Statements and financial statements commencing on page F-1.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.