Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, primarily from changes in interest rates, currency exchange rates, energy commodity prices and commercial energy rates. From time to time, we enter into transactions that have been authorized according to documented policies and procedures in order to manage these risks. These transactions primarily relate to the financial instruments described below. Since the counterparties to these financial instruments are large commercial banks and similar financial institutions, we do not believe that we are exposed to material counterparty credit risk. We do not use financial instruments for trading purposes.
If we utilized our 2018 Revolving Credit Facility, we would be exposed to changes in interest rates. Our 2018 Revolving Credit Facility bears interest, at our option, at a rate to either (i) the Adjusted Term SOFR Rate and Adjusted EURIBOR Rate (each, as defined in the 2018 Credit Agreement), plus an applicable margin initially equal to 3.00% per annum or (ii) the ABR Rate, plus an applicable margin initially equal to 2.00% per annum, in each case with two 25 basis point step downs based on achievement of certain senior secured first lien net leverage ratios.
Our exposure to changes in currency exchange rates results primarily from:
• sales made by our subsidiaries in currencies other than local currencies;
• raw material purchases made by our foreign subsidiaries in currencies other than local currencies; and
• investments in and intercompany loans to our foreign subsidiaries and our share of the earnings of those subsidiaries, to the extent denominated in currencies other than the U.S. dollar.
Our exposure to changes in energy commodity prices and commercial energy rates results primarily from the purchase or sale of refined oil products and the purchase of natural gas and electricity for use in our manufacturing operations.
Interest rate risk management. We have previously entered into agreements with financial institutions that were intended to limit our exposure to additional interest expense due to increases in variable interest rates. These instruments effectively capped our interest rate exposure. As of December 31, 2023, we did not have any outstanding interest rate swaps. As of December 31, 2022 , we recorded unrealized pre-tax gains of $27.4 million on our interest rate swaps. As of December 31, 2023, we no longer had any variable rate debt outstanding and therefore no exposure to variability in interest rates. See Note 8, "Fair Value Measurements and Derivative Instruments" in the Notes to the Consolidated Financial Statements for further discussion.
Currency rate management. We enter into foreign currency derivatives from time to time to attempt to manage exposure to changes in currency exchange rates. These foreign currency derivatives, which include, but are not limited to, forward exchange contracts and purchased currency options, attempt to hedge global currency exposures. Forward exchange contracts are agreements to exchange different currencies at a specified future date and at a specified rate. Purchased currency options are instruments which give the holder the right, but not the obligation, to exchange different currencies at a specified rate at a specified date or over a range of specified dates. Forward exchange contracts and purchased currency options are carried at fair value.
Our outstanding foreign currency derivatives represented a net unrealized pre-tax gain of $0.1 million at December 31, 2023 and a net unrealized pre-tax loss of $0.2 million at December 31, 2022.
Energy commodity management. We previously entered into commodity derivative contracts to effectively fix some or all of our exposure to refined oil products. As of December 31, 2023 and 2022, there were no commodity derivative contracts outstanding.
Sensitivity analysis. We use sensitivity analysis to quantify potential impacts that market rate changes may have on the underlying exposures as well as on the fair values of our derivatives. The sensitivity analysis for the derivatives represents the hypothetical changes in value of the hedge position and does not reflect the related gain or loss on the forecasted underlying transaction.
As of December 31, 2023, a 10% appreciation or depreciation in the value of the U.S. dollar against foreign currencies from the prevailing market rates would result in a corresponding decrease of $2.0 million or a corresponding increase of $2.0 million, respectively, in the fair value of the foreign currency hedge portfolio.
For further information related to the financial instruments described above, see Note 1, "Business and Summary of Significant Accounting Policies" and Note 8, "Fair Value Measurements and Derivative Instruments" in the Notes to the Consolidated Financial Statements for additional information.
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