ENCORE CAPITAL GROUP INC 10-K

Item 7A—Quantitative and Qualitative Disclosures About Market Risk We are exposed to economic risks from foreign currency exchange rates and interest rates. A portion of these risks is hedged, but the risks may affect our financial statements. Foreign Currency Exchange Rates We have operations in foreign countries, which expose us to foreign currency exchange rate fluctuations due to transactions denominated in foreign currencies. Our primary foreign currency exposures relate to the British Pound, Euro, and Indian Rupee. We continuously evaluate and manage our foreign currency risk through the use of derivative financial instruments, including foreign currency forward contracts with financial counterparties where practicable. Such derivative instruments are viewed as risk management tools and are not used for speculative or trading purposes. Cross-currency swap agreements are used to effectively convert fixed-rate Euro-denominated borrowings and fixed-rate GBP-denominated borrowings, including the principal amount of the underlying debt and periodic interest payments, to fixed-rate U.S. dollar denominated debt and are accounted for as fair value hedges. In association with fixed-rate Euro-denominated borrowings, we have three cross-currency swap agreements with a total notional amount of €350.0 million (approximately $386.3 million based on an exchange rate of $1.00 to €0.91, the exchange rate as of December 31, 2023) that effectively convert interest and principal payments on €350.0 million of our Euro-denominated debt from Euro to U.S. dollar. The cross-currency derivative instruments have maturities of October 2025. As of December 31, 2023, the cross-currency swap agreements had a fair value liability position of $28.0 million. These swaps eliminate the foreign currency risk associated with the hedged portion of our Euro-denominated borrowings. If the U.S. dollar were to weaken or strengthen against the Euro by 5%, the result would have a favorable or unfavorable effect on the cross-currency swap agreements’ fair value of $20.9 million and $19.7 million, respectively. In association with fixed-rate GBP-denominated borrowings, we have three cross-currency swap agreements with a total notional amount of £300.0 million (approximately $381.9 million based on an exchange rate of $1.00 to £0.79, the exchange rate as of December 31, 2023) that effectively convert interest and principal payments on £300.0 million of our GBP-denominated debt from GBP to U.S. dollar. The cross-currency derivative instruments have maturities of February 2026. As of December 31, 2023, the cross-currency swap agreements had a fair value asset position of $0.4 million. These swaps eliminate the foreign currency risk associated with the hedged portion of our GBP-denominated borrowings. If the U.S. dollar were to weaken or strengthen against the GBP by 5%, the result would have a favorable or unfavorable effect on the cross-currency swap agreements’ fair value of $20.2 million and $19.9 million, respectively. Interest Rates We have variable interest-bearing borrowings under our credit facilities that subject us to interest rate risk. We have, from time to time, utilized derivative financial instruments, including interest rate swap contracts and interest rate cap contracts with financial counterparties to manage our interest rate risk. As of December 31, 2023, we held five interest rate swap contracts with a total current notional amount of $260.4 million and a total notional amount of $718.5 million. As of December 31, 2023, we held four interest rate cap contracts with a total current notional amount $759.8 million and a total notional amount of approximately $1,084.4 million used to manage risk related to interest rate fluctuations. Both the interest rate swap and the interest rate cap instruments are designated as cash flow hedges and are accounted for using hedge accounting. Refer to “Note 3: Derivatives and Hedging Instruments” for further details. Our variable interest-bearing debt that is not hedged by derivative financial instruments is subject to the risk of interest rate fluctuations. Significant increases in future interest rates on our variable rate debt could lead to a material decrease in future earnings assuming all other factors remain constant. The rates used in our variable interest-bearing debt are based on Term SOFR, EURIBOR, or other index rates, which in certain cases are subject to a floor. A hypothetical 50 basis points increase or decrease in interest rates as of December 31, 2023 related to variable rate debt agreements not hedged by derivatives would have a $3.7 million positive or negative impact on income before income taxes. As of December 31, 2023, our outstanding interest rate swap agreements had a fair value liability position of $22.5 million. If the market interest rates increased 50 basis points, the result would have a favorable effect to the interest rate swap’s fair value of $11.7 million. Conversely, if the market interest rates decreased 50 basis points, the result would have an unfavorable effect to the interest rate swap’s fair value of $12.0 million. As of December 31, 2023, our outstanding interest rate cap contracts had a fair value asset position of $17.0 million. If the market interest rates increased 50 basis points, the result would have a favorable effect on the interest rate cap’s fair value of $3.0 million. Conversely, if the market interest rates decreased 50 basis points, the result would have an unfavorable effect on the interest rate cap’s fair value of $2.8 million. Our analysis and methods used to assess and mitigate the risks discussed above should not be considered projections of future risks. 50 Item 8—Financial Statements and Supplementary Data Our consolidated financial statements, the notes thereto and the Report of BDO USA, P.C., our Independent Registered Public Accounting Firm, are included in this Annual Report on Form 10-K on pages F-1 through F-36. Item 9—Changes in and Disagreements With Accountants on Accounting and Financial Disclosure None.