Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. 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 18 to our consolidated financial statements for additional information on our financial instruments.
Interest Rate Risk. At March 31, 2022, we had interest rate swap agreements to fix the interest rate on $1.7 billion of variable rate LIBOR-based debt. See Note 18 to our 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 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, certain production and related loans, our Production Tax Credit Facility and our IP Credit Facility, 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 $1.25 billion, based on
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the applicable LIBOR in effect as of March 31, 2022, each quarter point change in interest rates would result in a $2.6 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 individual production and related loans incur primarily LIBOR and SOFR-based interest at a weighted average rate of approximately 3.00%, including applicable margins ranging from 1.75% over a LIBOR rate to 3.00% over a LIBOR rate, or 1.75% over a SOFR rate to 3.25% over a SOFR rate, each depending on the respective LIBOR or SOFR term. A quarter point increase of the interest rates on the outstanding principal amount of our variable rate individual production and related loans would result in $3.1 million in additional costs capitalized to the respective film or television asset.
The applicable margin with respect to advances under the Production Tax Credit Facility is a percentage per annum equal to SOFR plus 0.10% to 0.25% depending on the SOFR term (i.e., one, three or six months) plus 1.50% per annum. Assuming the Production Tax Credit Facility is utilized up to its maximum capacity of $235.0 million, based on the applicable SOFR in effect as of March 31, 2022, each quarter point change in interest rates would result in a $0.6 million change in annual net interest expense on the Production Tax Credit Facility.
The applicable margin with respect to advances under the IP Credit Facility is a percentage per annum equal to a LIBOR rate plus 2.25%. Based on the applicable LIBOR in effect as of March 31, 2022, each quarter point change in interest rates on the outstanding amount under the IP Credit Facility would result in a $0.3 million change in annual net interest expense on the IP Credit Facility.
At March 31, 2022, our 5.500% Senior Notes had an outstanding carrying value of $965.8 million, and an estimated fair value of $962.5 million. A 1% increase in the level of interest rates would decrease the fair value of the 5.500% Senior Notes by approximately $52.9 million, and a 1% decrease in the level of interest rates would increase the fair value of the 5.500% Senior Notes by approximately $49.5 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 March 31, 2022:
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Year Ended March 31, Fair Value
2023 2024 2025 2026 2027 Thereafter Total March 31,
2022
(Amounts in millions)
Variable Rates (1) :
Revolving Credit Facility (2)
$ — $ — $ — $ — $ — $ — $ — $ —
Average Interest Rate — — — — — —
Term Loan A (2)(3)
210.3 28.9 41.1 44.5 313.7 — 638.5 625.7
Average Interest Rate 2.20 % 2.20 % 2.20 % 2.20 % 2.20 % —
Term Loan B (2)
12.5 12.5 819.2 — — — 844.2 828.3
Average Interest Rate 2.70 % 2.70 % 2.70 % — — —
Production and related loans (4)
732.9 190.1 363.7 — — — 1,286.7 1,286.7
Average Interest Rate 3.16 % 2.53 % 1.28 % — — —
IP Credit Facility (5)
27.1 25.4 26.3 26.3 18.4 — 123.5 123.5
Average Interest Rate 2.70 % 2.70 % 2.70 % 2.70 % 2.70 % —
Fixed Rates:
5.500% Senior Notes — — — — — 1,000.0 1,000.0 962.5
Average Interest Rate — — — — — 5.50 %
Interest Rate Swaps (6)
Variable to fixed notional amount — — 300.0 — 500.0 900.0 1,700.0 (25.8)
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(1) On April 1, 2022, the Company received $125.0 million under the IGR Facility, not reflected in the amounts above (see Note 8 and Note 21 to our consolidated financial statements for further information).
(2) The effective interest rate in the table above is before the impact of interest rate swaps.
(3) In April 2022, the Company voluntarily prepaid the entire outstanding principal amount of the 2023 Term Loan A of $193.6 million, together with accrued and unpaid interest (see Note 21 to our consolidated financial statements for subsequent events).
(4) Production and related loans include individual loans for the production of film and television programs that the Company produces or licenses and the Company's Production Tax Credit Facility. Production Tax Credit Facility amounts represent outstanding amounts under our Production Tax Credit Facility at March 31, 2022, and the repayment date represents the maturity date of the Production Tax Credit Facility (January 27, 2025), however net advances and payments under the Production Tax Credit Facility can fluctuate depending on the amount of collateral available.
(5) IP Credit Facility amounts represent outstanding amounts under our IP Credit Facility at March 31, 2022, and repayment dates are based on the projected future cash flows generated from the exploitation of the rights, subject to a minimum guaranteed payment amount, as applicable.
(6) 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 18 to our consolidated financial statements.
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