Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk primarily from changes in interest rates and foreign currency exchange rates. These rate changes may affect future income, cash flows and the fair value of the Company, its assets and its liabilities. In certain situations, we may seek to reduce volatility associated with changes in interest rates and foreign currency exchange rates by entering into derivative financial instruments intended to provide a hedge against a portion of the risks associated with such volatility. We continue to have exposure to such risks to the extent they are not hedged. We enter into derivative financial instruments to the extent they meet the objectives described above, and we do not use derivatives for speculative purposes.
Interest Rate Risk
We are exposed to interest rate risk on our variable-rate indebtedness. Our primary sensitivity in 2022 was to changes in one-month LIBOR, as the interest rate on our Term Loan, which represents the majority of our variable-rate indebtedness, was based on this benchmark rate until we amended the credit agreement that governs our Term Loan in December 2022 to adjust our LIBOR-based variable rate to a SOFR-based variable rate. We use an interest rate swap in order to maintain what we believe to be an appropriate level of exposure to interest rate variability. As of December 31, 2022, we held an interest rate swap for a portion of the Term Loan, for which we executed an amendment concurrent with the amendment for our Term Loan, through which we receive one-month term SOFR and pay a fixed rate. We elected to designate this interest rate swap as a cash flow hedge for accounting purposes and applied the practical expedient as prescribed in ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting that allowed us to maintain hedge accounting with the transition to SOFR.
The following table sets forth the current carrying values of our contractual maturities, total fair values and interest rates as of December 31, 2022 for our financial instruments that are materially affected by interest rate risk, including long-term debt and our interest rate swap:
Maturities by Period
2023 2024 2025 2026 2027 Thereafter Carrying Value Fair Value
(dollars in millions)
Long-term debt (1) :
Fixed-rate long-term debt
$ — $ — $ 500 $ — $ 600 $ 4,900 $ 6,000 $ 5,292
Weighted average fixed interest rate (2)
4.37 %
Variable-rate long-term debt
$ — $ — $ — $ 2,619 $ — $ — $ 2,619 $ 2,616
Variable interest rate (2)(3)
6.17 %
Interest rate swap (4) :
Variable to fixed
$ — $ — $ — $ 1,600 $ — $ — $ 1,600 $ 108
Variable interest rate receivable (3)
4.32 %
Fixed interest rate payable
1.76 %
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(1) The carrying values exclude the deduction for unamortized deferred financing costs and any applicable discounts, as well as all finance lease liabilities and other debt of consolidated VIEs totaling $164 million and $37 million, respectively, as of December 31, 2022.
(2) The fixed interest rate is the weighted average of actual rates, and the variable interest rate is based on the market rate prevailing as of December 31, 2022.
(3) The variable interest rate receivable on the interest rate swap does not include fixed components of the overall variable interest rate, including applicable spreads.
(4) The carrying value reflects the notional amount and the variable interest rate receivable is based on the market rate prevailing as of December 31, 2022. We measure our derivative instruments at fair value and, as of December 31, 2022, our interest rate swap was in an asset position.
Refer to Note 10: "Fair Value Measurements" in our consolidated financial statements for additional information on the fair value measurements of our long-term debt and interest rate swap.
Foreign Currency Exchange Rate Risk
We conduct business in various currencies and are exposed to earnings and cash flow volatility associated with changes in foreign currency exchange rates. Our principal exposure results from management and franchise fees earned in foreign currencies, as well as revenues and expenses from our international leased hotels. The value of these revenues and expenses could change materially in relation to the functional currencies of the exposed entities and to our reporting currency, USD. We also have exposure from our international financial assets and liabilities, including certain intercompany financing arrangements
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not deemed to be permanently invested, the value of which could change materially in relation to the functional currencies of the exposed entities. As of December 31, 2022, our largest net exposures were to GBP and EUR.
We use forward contracts designated as cash flow hedges to offset exposure from foreign currency exchange rate risks associated with certain of our management, franchise and other fees denominated in certain foreign currencies. We use forward contracts not designated as hedging instruments to offset exposure to foreign currency exchange rate fluctuations in certain cash and intercompany loan balances . We do not consider the fair value or earnings effect of these forward contracts to be material to our consolidated financial statements.
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