Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Currency and Interest Rate Risk Management
Market risks relating to our operations result primarily from changes in interest rates and changes in foreign currency exchange rates. Our exposure to interest rate risk results from the financial debt instruments that arise from transactions entered into during the normal course of business. As part of our overall risk management program, we evaluate and manage our exposure to changes in interest rates and currency exchange risks on an ongoing basis. Hedges and derivative financial instruments will continue to be used in the future in order to manage our interest rate and currency exposure. We have no intention of entering into financial derivative contracts, other than to hedge a specific financial risk.
Currency Rate Risk. We enter into forward foreign exchange contracts to hedge our foreign currency exposures on future production expenses denominated in various foreign currencies. These contracts are entered into with major financial institutions as counterparties. We are exposed to credit loss in the event of nonperformance by the counterparty, which is limited to the cost of replacing the contracts, at current market rates. We do not require collateral or other security to support these contracts. See Note 16 to our unaudited condensed consolidated financial statements for additional information on our financial instruments.
Interest Rate Risk. At December 31, 2020, we had interest rate swap agreements to fix the interest rate on $1.7 billion of variable rate LIBOR-based debt. See Note 16 to our unaudited condensed consolidated financial statements for additional information. The difference between the fixed rate to be paid and the variable rate received under the terms of the interest rate
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swap agreements will be recognized as interest expense for the related debt. Changes in the variable interest rates to be paid or received pursuant to the terms of the interest rate swap agreements will have a corresponding effect on future cash flows.
Certain of our borrowings, primarily borrowings under our Senior Credit Facilities and certain production loans, are, and are expected to continue to be, at variable rates of interest and expose us to interest rate risk. If interest rates increase, our debt service obligations on the variable rate indebtedness would increase even though the amount borrowed remained the same, and our net income would decrease. The applicable margin with respect to loans under the revolving credit facility and Term Loan A is a percentage per annum equal to a LIBOR rate plus 1.75%. The applicable margin with respect to loans under our Term Loan B is a percentage per annum equal to a LIBOR rate plus 2.25%. Assuming the revolving credit facility is drawn up to its maximum borrowing capacity of $1.5 billion, based on the applicable LIBOR in effect as of December 31, 2020, each quarter point change in interest rates would result in a $3.6 million change in annual net interest expense on the revolving credit facility, Term Loan A, Term Loan B and interest rate swap agreements.
The variable interest production loans incur interest at rates ranging from approximately 2.28% to 2.96% and applicable margins ranging from 1.75% over the one, two, or three-month LIBOR to 2.25% over the one, two, or three-month LIBOR. A quarter point increase of the interest rates on the outstanding principal amount of our variable rate production loans would result in $0.8 million in additional costs capitalized to the respective film or television asset.
At December 31, 2020, our 5.875% Senior Notes and 6.375% Senior Notes had an outstanding carrying value of $1,046.5 million, and an estimated fair value of $1,085.8 million. A 1% increase in the level of interest rates would decrease the fair value of the 5.875% Senior Notes and 6.375% Senior Notes by approximately $19.3 million, and a 1% decrease in the level of interest rates would increase the fair value of the 5.875% Senior Notes and 6.375% Senior Notes by approximately $12.0 million.
The following table presents information about our financial instruments that are sensitive to changes in interest rates. The table also presents the cash flows of the principal amounts of the financial instruments, or the cash flows associated with the notional amounts of interest rate derivative instruments, and related weighted-average interest rates by expected maturity or required principal payment dates and the fair value of the instrument as of December 31, 2020:
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Three Months Ending March 31, Year Ending March 31, Fair Value
2021 2022 2023 2024 2025 Thereafter Total December 31,
2020
(Amounts in millions)
Debt and Production Loans
Variable Rates:
Revolving Credit Facility (1)
$ — $ — $ — $ — $ — $ — $ — $ —
Average Interest Rate — — — — — —
Term Loan A (1)
13.1 75.0 585.0 — — — 673.1 652.9
Average Interest Rate 1.89 % 1.89 % 1.89 % — — —
Term Loan B (1)
3.2 12.5 12.5 12.5 915.1 — 955.8 931.9
Average Interest Rate 2.39 % 2.39 % 2.39 % 2.39 % 2.39 % —
Production loans — 160.4 53.3 106.4 — — 320.1 320.1
Average Interest Rate — 2.82 % 2.46 % 2.39 % — —
Fixed Rates:
5.875% Senior Notes — — — — 518.7 — 518.7 526.5
Interest Rate — — — — 5.875 % —
6.375% Senior Notes — — — 545.6 — — 545.6 559.3
Interest Rate — — — 6.375 % — —
Interest Rate Swaps (2)
Variable to fixed notional amount — — — — 300.0 1,400.0 1,700.0 165.5
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(1) The effective interest rate in the table above is before the impact of interest rate swaps.
(2) Represents interest rate swap agreements on certain of our LIBOR-based floating-rate debt with fixed rates paid ranging from 1.840% to 2.915% with maturities beginning in March 2025 through March 2030. See Note 16 to our unaudited condensed consolidated financial statements.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.