Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk from changes in interest rates and currency exchange rates. We manage our exposure to these risks by monitoring available financing alternatives and through pricing policies that may take into account currency exchange rates. We do not foresee any significant changes in either our exposure to fluctuations in interest rates or how we manage interest rates or currency rates or how we manage such exposure in the future.
Interest Rate Risk
We are exposed to interest rate risk on our variable-rate debt, comprised of the term loans, Revolver and our Timeshare Facility, of which the Timeshare Facility is without recourse to us. The interest rates are based on one-month Secured Overnight Financing Rate (“SOFR”), and we are most vulnerable to changes in these rates. We primarily use interest rate swaps as part of our interest rate risk management strategy for our variable-rate debt.
We intend to securitize timeshare financing receivables in the asset-backed financing market periodically. We expect to secure fixed-rate funding to match our fixed-rate timeshare financing receivables. However, if we have variable-rate debt in the future, we will monitor the interest rate risk and evaluate opportunities to mitigate such risk through the use of derivative instruments.
To the extent we continue to have variable-rate borrowings and continue to utilize variable-rate indebtedness in the future, any increase in interest rates beyond amounts covered under any corresponding derivative financial instruments, particularly if sustained, could have an adverse effect on our net income, cash flows and financial position. While we have entered into certain hedging transactions to address such potential risk, such transactions and any future hedging transactions we may enter into may not adequately mitigate the adverse effects of interest rate increases or that counterparties in those transactions will honor their obligations.
The following table sets forth the contractual maturities, weighted-average interest rates and the total fair values as of December 31, 2023, for our financial instruments that are materially affected by interest rate risk:
Maturities by Period
($ in millions) Weighted
Average
Interest
Rate (1)
2024 2025 2026 2027 2028 There-
after Total (2)
Fair
Value
Assets:
Fixed-rate securitized timeshare financing receivables 14.275 % $ 124 $ 130 $ 135 $ 133 $ 122 $ 340 $ 984 $ 918
Fixed-rate unsecuritized timeshare financing receivables 15.070 % 154 157 170 185 202 1,009 1,877 1,371
Liabilities: (3)
Fixed-rate debt 4.718 % 259 206 163 119 94 1,500 2,341 2,194
Variable-rate debt 7.641 % 13 413 451 13 1,219 124 2,233 2,244
(1) Weighted-average interest rate as of December 31, 2023.
(2) Amount excludes unamortized deferred financing costs.
(3) Includes debt and non-recourse debt.
72
Table of Contents
Foreign Currency Exchange Rate Risk
Though the majority of our operations are conducted in United States dollar (“U.S. dollar”), we are exposed to earnings and cash flow volatility associated with changes in foreign currency exchange rates. Our principal exposure results from our timeshare financing receivables denominated in Japanese yen and Canadian dollars, the value of which could change materially in reference to our reporting currency, the U.S. dollar. For the purpose of analyzing foreign currency exchange risk, we considered the historical trends in foreign currency exchange rates and determined that an adverse change in exchange rates of 10% would be considered immaterial as of December 31, 2023.
73
Table of Contents