Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Hedging our Floating Rate Borrowings
As of December 31, 2022, the interest rates for 89% of our consolidated borrowings were fixed or swap-fixed with interest rate swaps. Our use of these instruments exposes us to credit risk from the potential inability of our counterparties to perform under the terms of those agreements. We attempt to minimize this credit risk by contracting with a variety of financial counterparties with investment grade ratings. As of December 31, 2022, the interest expense for our floating rate borrowings that are not hedged would increase by $5.6 million per year for every one hundred basis point increase in the related benchmark interest rate. See Note 8 to our consolidated financial statements in Item 15 of this Report for the future swap expirations with a total notional amount of $837.4 million in the first quarter of 2023. Higher interest rates would cause an increase in our future interest expense, which would reduce our future net income and cash flows from operations.
Market Transition to SOFR from USD-LIBOR
On March 5, 2021, the FCA announced that USD-LIBOR would no longer be published after June 30, 2023. This announcement has several implications, including setting the type of SOFR to which LIBOR is converted (e.g., Term SOFR, Daily Simple SOFR or Daily Compounded SOFR) and agreeing on a spread that may be applied when converting contracts from USD-LIBOR to SOFR. As of December 31, 2022, most of our floating rate borrowings and interest rate swaps are indexed to USD-LIBOR, and we currently expect that all of these loans and interest rate swaps will be converted to SOFR by July 1, 2023. We are evaluating issues relating to transitioning contracts to SOFR - which include, among other issues, the calculation of: (i) loan interest payments, (ii) swap interest payments, and (iii) the value of, and accounting for, loans and swaps. While we currently expect USD-LIBOR to be available in substantially its current form until at least June 30, 2023, it is possible that USD-LIBOR will become unavailable prior to that time. This could occur if, for example, sufficient banks decline to make submissions to the LIBOR administrator. In that case, the risks associated with the transition to SOFR will be accelerated and potentially magnified.
See Notes 8 and 10 to our consolidated financial statements in Item 15 of this Report for more information regarding our debt and interest rate swaps.
Item 8. Financial Statements and Supplementary Data
See the Index to our Financial Statements in Item 15 .
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
55
Table of Contents
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.