Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks in the ordinary course of our business, which primarily relate to fluctuations in interest rates and foreign currency exchange rates. We manage our exposure to (i) interest rate risk by entering into derivative financial instruments for a portion of principal amount of our debt and (ii) foreign currency exchange rates risk by entering into derivative financial instruments to hedge, in part, fluctuations in foreign currency exchange rates and through internally established policies and procedures. The objective of our policies is to mitigate potential income statement, cash flow, and fair value exposures resulting from possible future adverse fluctuations in rates. We do not engage in trading, market making or other speculative activities in the derivatives markets to manage these risks.
Interest Rate Risk
We are exposed to market risk from changes in interest rates on debt, which bears interest at variable rates. Interest rate risk is highly sensitive due to many factors, including U.S. monetary and tax policies, U.S. and international economic factors and other factors beyond our control. Our debt has floating interest rates and we are exposed to changes in such floating interest rates. Until July 26, 2024, we had interest rate risk primarily related to our senior secured term loans under the Original Credit Agreement which bore interest at a variable rate that was based on synthetic LIBOR or SOFR (subject to certain benchmark replacement provisions and certain interest rate floors, as applicable). Upon
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refinancing in July 2024, we have interest rate risk primarily related to our term loans under the A&R Credit Agreement (see note 13 — Long-term Debt to our consolidated financial statements included elsewhere in this Annual report) which bear interest at a variable rate based on SOFR (subject to certain benchmark replacement provisions and an interest rate floor). Therefore, increases in interest rates may reduce our net income or increase our net loss by increasing the cost of debt. As of December 31, 2024, we had $1,384 million of term loans that were outstanding under the A&R Credit Agreement, net of unamortized debt discount and unamortized debt issuance costs, and $360 million of revolving credit facility availability under the A&R Revolving Credit Facility as of such date.Based on the outstanding debt under the A&R Credit Agreement as of December 31, 2024, and assuming that our mix of debt instruments and other variables remain unchanged, but including the impact of expected receipts or payments of cash flows resulting from interest rate swap contracts, a hypothetical 100 basis points increase or decrease in SOFR would have increased or decreased our interest expense by $5 million on an annualized basis.
In February 2022, we entered into an interest rate swap for a notional amount of $600 million of debt for a period covering from March 2022 to March 2025 to hedge against future increases in the benchmark rate for the senior secured tranche B-3 term loan facilities. The terms of such swap were initially linked to LIBOR as the benchmark rate, with an adjusted SOFR-based rate replacing LIBOR as the benchmark rate for such swap commencing in June 2023. In June 2022, we terminated this February 2022 interest rate swap contract and realized $23 million of cash. We simultaneously entered into another swap contract with substantially the same terms and conditions as the February 2022 swap, except the fixed interest rate component was changed. In March 2023, we amended the terms to change the reference rate for the variable leg from LIBOR to SOFR to match the reference rate on the underlying debt that was amended in January 2023. Further, the interest rate on the fixed leg of the interest rate swap changed from 3.6858% to 3.6800%. The interest rate swap continued to be designated as a cash flow hedge that was highly effective at offsetting the increases in cash outflows when three-month SOFR exceeded 3.6800%. In order to further hedge against future increases in the benchmark rate for the senior secured tranche B-3 term loan facilities, in February 2023, we entered into another interest rate swap agreement for a notional amount of $300 million of debt for a period covering from March 2023 to March 2027. The terms of the agreement required us to receive a variable rate of three months U.S. SOFR, with a floor of 0.90%, and pay fixed rate of 4.295%. Following the debt refinancing in July 2024, we terminated both the interest rate swap contracts in September 2024 and made a payment to the counter-party of $4 million, in cash, representing the fair value of the contracts on the termination date. We simultaneously entered into two new interest rate swap agreements for a notional amount of $400 million of debt for a period covering September 2024 to March 2028 and a notional amount of $500 million of debt for a period covering September 2024 to July 2029 (the "September IRS Contracts"). The terms of the agreements require us to receive a variable rate of three months U.S. SOFR and pay a fixed rate of 3.242% and 3.226%, respectively (see note 21 - Derivatives and Hedging and note 22 - Fair Value Measurements to our consolidated financial statements included elsewhere in this Annual Report for further information).
The interest rate swap contracts are considered as an accounting hedge under ASC 815. As of December 31, 2024, we had recognized $27 million of interest rate swap derivative assets on our consolidated balance sheets.
In January 2025, we terminated the September IRS Contracts and received $31 million, in cash, representing the fair value of the contracts on the termination date. We simultaneously entered into two new interest rate swap agreements with similar terms as the September IRS Contracts, except that the terms of the agreements require us to receive a variable rate of three months U.S. SOFR and pay a fixed rate of 4.2075% for $400 million notional rate contract and 4.209% for $500 million notional rate contract.
Foreign Currency Exchange Rate Risk
Our results of operations and cash flows are subject to fluctuations due to changes in foreign currency exchange rates relative to U.S. dollars, our functional and reporting currency. Our revenue is generated primarily in U.S. dollars, British pounds sterling, and Euros. Our expenses are generally denominated in the currency of the country in which our operations are located, which are primarily in the U.S., Europe and Asia. Our functional currency is denominated in U.S. dollars. Our results of operations and cash flows are, therefore, subject to fluctuations due to changes in foreign currency exchange rates in ways that are unrelated to our operating performance. As exchange rates may fluctuate significantly between periods, revenue and operating expenses, when converted into U.S. dollars, may also experience significant fluctuations between periods.
In order to mitigate a portion of our exposure to changes in foreign currency exchange rates related to the value of our investments in foreign subsidiaries denominated in the Euro, during the year ended December 31, 2024, we entered into a cross currency interest rate swap contract and designated it as a net investment hedge (see note 21 - Derivatives and Hedging and note 22 - Fair Value Measurements to our consolidated financial statements included elsewhere in this Annual Report for further information). Any change in the fair value of the net investment hedge would be more than offset by a change in the value of our investments in certain of our European subsidiaries. Additionally, during times of a strengthening United States dollar against the Euro, we would be required to use a lower amount of our cash flows from
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operations to pay interest on our term loans and to settle our cross-currency interest rate swap contract, whereas during times of a weakening United States dollar against the Euro, we would be required to use a greater amount of our cash flows from operations to pay interest on our term loans and to settle our cross-currency interest rate swap contract. As of December 31, 2024, we had less than $1 million of cross currency swap derivative liability on our consolidated balance sheets.
In 2025, we also entered into certain foreign currency forward contracts that act as economic hedges to offset exposure to foreign currency exchange rate fluctuations resulting from certain of our intercompany balances.
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Item 8. Financial Statements and Supplementary Data
The financial statements required by this Item are included in Item 15 of this Annual Report, are presented beginning on page F-1 and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.