Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary exposure to market risk relates to unfavorable changes in interest rates on our variable-rate debt. Fluctuations in interest rates impact the interest expense on our variable-rate debt.
We may borrow under the Credit Agreement, at our option, at either (a) term SOFR plus an applicable margin initially and through the delivery of the March 31, 2026 compliance certificate of 1.75% and then ranging from 1.25% to 2.00%, or (b) a base rate plus an applicable margin initially and through the delivery of the March 31, 2026 compliance certificate of 0.75% and then ranging from 0.25% to 1.00%. As of December 31, 2025, there was nothing drawn on the Revolver and $600 million outstanding on the Initial Term Loan.
Additionally, in September 2025, we entered into two interest rate swap agreements with a combined notional amount of $350 million. See Note 8 of “Notes to the Consolidated Financial Statements.” These interest rate swap agreements, which are effective January 2026, convert the interest rate on $350 million drawn under our Initial Term Loan from a variable rate plus an applicable margin to a fixed rate of 3.218% plus the same applicable margin. During the term of these interest rate swap agreements, we will be required to make monthly payments to the counterparties when one-month SOFR is below the fixed rate of 3.218% in an amount equal to the difference between the then current one-month SOFR and the fixed rate multiplied by the notional amount and adjusted for the number of days in the month divided by 360, while the counterparties are obligated to make monthly payments to us when one-month SOFR exceeds the fixed rate in an amount equal to the difference between the then current one-month SOFR and the fixed rate multiplied by the notional amount and adjusted for the number of days in the month divided by 360. We may be exposed to credit risk in the derivative financial instruments we use. Credit risk is the failure of the counterparties to perform under the terms of the derivative financial instruments. If the fair value of a derivative financial instrument is positive, the counterparties will owe us, which creates credit risk for us. If the fair value of a derivative financial instrument is negative, we will owe the counterparties and, therefore, do not have credit risk. We seek to minimize the credit risk in derivative financial instruments by entering into transactions with major financial institutions that have high credit ratings.
We have historically presented a quantitative measure of our interest rate risk in a tabular disclosure of our interest sensitive assets and liabilities. Beginning with this report, we have revised our interest rate risk disclosure alternative from the tabular format to a sensitivity analysis, which we believe is a more commonly used and easily understood disclosure alternative. There was no sensitivity analysis performed for 2024, as we had no outstanding variable rate debt as of December 31, 2024.
As of the hedge effectiveness date in January 2026, $250 million of the $600 million outstanding Initial Term Loan will not be covered by the interest rate swap agreements. If interest rates were to change by 1.0% and our variable rate indebtedness
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were to remain unchanged, interest expense would increase or decrease by approximately $2.3 million for the next twelve months.
See Note 14 of “Notes to the Consolidated Financial Statements” for further discussion on the Credit Agreement.