Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to a number of market related risks, including changes in interest rates, fuel prices, foreign exchange rates and changes in the market price of investments held in our master trust used to fund defined benefit pension obligations. We have historically employed financial derivative instruments from time to time to reduce these risks. We do not use financial instruments or derivatives for any trading or other speculative purposes. We currently utilize derivative financial instruments to reduce the market risks related to changes in interest rates, fuel prices and foreign exchange rates.
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Interest Rate Risk
We are exposed to market pricing risk consisting of interest rate risk related to certain of our debt instruments and notes receivable outstanding. Our debt obligations are more fully described in Note 10—Long-Term Debt to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report. Interest rate risk is managed through the strategic use of fixed and variable rate debt and derivative instruments. As more fully described in Note 9—Derivatives to the Consolidated Financial Statements included in Item 8. Financial Statements and Supplementary Data of this Annual Report, we have used interest rate swap agreements with the objective to protect us against adverse changes in interest rates by effectively converting certain of our variable rate obligations to fixed rate obligations. These interest rate swaps are derivative instruments designated as cash flow hedges on the forecasted interest payments related to a certain portion of our debt obligations. Our variable rate borrowings consist primarily of LIBOR based loans, which is the benchmark interest rate being hedged in our interest rate swap agreements.
Changes in interest rates could also affect the interest rates we pay on future borrowings under our ABL Credit Facility and Term Loan Facility, which rates are typically related to LIBOR. We estimate that a 100 basis point increase in the interest rates related to our variable rate borrowings would increase our annualized interest expense by approximately $5.4 million , net of the floating interest rate receivable on our interest rate swaps. Changes in interest rates related to our fixed rate debt instruments would not have an impact upon future results of operations or cash flows while outstanding; however, if additional debt issuances at higher interest rates are required to fund fixed rate debt maturities, future results of operations or cash flows may be impacted.
At August 1, 2020 , a 100 basis point increase in interest rates would decrease the unrealized fair market value of our debt currently bearing fixed rates by approximately $1.6 million , while a 100 basis point decrease in interest rates would increase the unrealized fair market value of those same debt instruments by approximately $1.7 million . At August 1, 2020 , a 100 basis point increase in forward LIBOR interest rates would increase the fair value of our outstanding interest rate swaps by approximately $60.4 million , while a 100 basis point decrease would decrease the fair value of those swaps by approximately $57.1 million .
Customer loans have been extended to certain wholesale customers in the normal course of business through notes receivable. The notes generally bear fixed interest rates negotiated with each wholesale customer. In fiscal 2020, notes receivable were accepted in conjunction with the sale of a distribution center and a business. The market value of the fixed rate notes is subject to change due to fluctuations in market interest rates.
The table below provides information about our financial instruments that are sensitive to changes in interest rates, including debt obligations, interest rate swaps and notes receivable. For debt obligations, the table presents principal amounts due and related weighted average interest rates by expected maturity dates using interest rates as of August 1, 2020 , excluding any original issue and purchase accounting discounts, and deferred financing costs. For interest rate swaps, the table presents the notional amounts and related weighted average interest rates by maturity. For notes receivable, the table presents the expected collection of principal cash flows and weighted average interest rates by expected year of maturity.
August 1, 2020
Expected Fiscal Year of Maturity
Fair Value
Total
2021
2022
2023
2024
2025
Thereafter
(in millions, except interest rates)
Long-term Debt:
Variable rate—principal payments
$
2,485
$
2,530
$
72
$
—
$
—
$
757
$
18
$
1,683
Weighted average interest rate (1)
3.6
%
4.4
%
—
%
—
%
1.6
%
4.4
%
4.4
%
Fixed rate—principal payments
$
51
$
49
$
13
$
13
$
14
$
8
$
1
$
—
Weighted average interest rate
5.2
%
5.3
%
5.3
%
5.3
%
4.8
%
4.4
%
—
Interest Rate Swaps (2) :
Notional amounts hedged under pay fixed, receive variable swaps
$
(139
)
$
2,443
$
360
$
360
$
823
$
450
$
250
$
200
Weighted average pay rate
2.5
%
2.3
%
2.4
%
1.7
%
2.2
%
2.6
%
2.9
%
Weighted average receive rate
0.1
%
0.1
%
0.1
%
0.1
%
0.1
%
0.1
%
0.2
%
Notes receivable:
Principal receivable
$
79
$
78
$
50
$
6
$
6
$
3
$
2
$
11
Weighted average receivable rate
5.8
%
6.1
%
5.8
%
5.6
%
6.3
%
6.7
%
4.6
%
(1)
Excludes the effect of interest rate swaps effectively converting certain of our variable rate obligations to fixed rate obligations.
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(2)
Includes forward starting swap contracts with notional amounts of $450.0 million which are not yet effective. Refer to Note 9—Derivatives n Part II, Item 8 of this Annual Report on Form 10-K for further information on interest rate swap contracts.
Fuel Price Risk
To reduce diesel price risk, we have entered into derivative financial instruments and/or forward purchase commitments for a portion of our projected monthly diesel fuel requirements at fixed prices. The fair values of fuel derivative agreements are measured using Level 2 inputs. As of August 1, 2020, our outstanding fuel supply agreements and derivative agreements had fair values with a net liability of $0.1 million. As of August 3, 2019, we had no outstanding fuel supply agreements and derivative agreements.
Foreign Exchange Risk
To reduce foreign exchange risk, we have entered into derivative financial instruments for a portion of our projected monthly foreign currency requirements at fixed prices. The fair values of foreign exchange derivative are measured using Level 2 inputs. As of August 1, 2020, our outstanding foreign exchange derivatives had fair values with a net liability of $0.2 million. As of August 3, 2019, our outstanding foreign currency forward contracts were immaterial.
Investment Risk
We assumed the defined benefit pension plan obligations and assets of the SUPERVALU Retirement Plan from the Supervalu acquisition. This plan holds investments in public and private equity, fixed income and real estate securities, which is described further in Note 14—Benefit Plans in Part II, Item 8 of this Annual Report. Changes in SUPERVALU Retirement Plan assets can affect the amount of our anticipated future contributions. In addition, increases or decreases in SUPERVALU Retirement Plan assets can result in a related increase or decrease to our equity through Accumulated other comprehensive loss. As of August 1, 2020 , a 10 percent unfavorable change in the total value of investments held by the SUPERVALU Retirement Plan (entirely within the return-seeking portion of the plan assets) would not have had an impact on our minimum contributions required under ERISA for fiscal 2021, but would have resulted in an unfavorable change in net periodic pension income for fiscal 2021 of $2 million and would have reduced stockholders’ equity by $176 million on a pre-tax basis as of August 1, 2020 .
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