Item 7A. Quantitative and Qualitative Disclosures About Market Risk
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
Foreign Currency Exchange Risk
A significant portion of our revenues and earnings are exposed to changes in foreign currency exchange rates. We seek to manage this foreign exchange risk in part through operational means, including managing same currency revenues in relation to same currency costs and same currency assets in relation to same currency liabilities.
From time to time, foreign exchange risk is managed through the use of foreign currency forward-exchange contracts. These contracts are used to offset the potential earnings effects from mostly intercompany foreign currency assets and liabilities that arise from operations and from intercompany loans. Any unhedged foreign exchange exposures continue to be subject to market fluctuations.
Our financial instrument holdings at year end were analyzed to determine their sensitivity to foreign exchange rate changes. The fair values of these instruments were determined as follows:
• foreign currency forward-exchange contracts — net present values
• foreign currency denominated receivables, payables, debt and loans — changes in exchange rates
In this sensitivity analysis, we assumed that the change in one currency’s rate relative to the U.S. Dollar would not have an effect on other currencies’ rates relative to the U.S. Dollar. All other factors were held constant.
If there were an adverse change in foreign currency exchange rates of 10%, the expected net effect on net income related to Viatris’ foreign currency denominated financial instruments would not be material.
The Company is also exposed to translation risk on non-U.S. dollar-denominated net assets. Non-U.S. dollar borrowings, principally our Euro and Yen denominated long-term debt, are used to hedge the foreign currency exposures of our net investment in certain foreign affiliates and are designated as hedges of net investments. The foreign exchange gains or losses on these hedges is included in the foreign currency translation component of accumulated other comprehensive income (loss). If our net investment decreases below the equivalent value of the non-U.S. debt borrowings, the change in the remeasurement basis of the debt would be subject to recognition in net income as changes occur.
Interest Rate and Long-Term Debt Risk
Viatris’ exposure to interest rate risk arises primarily from our U.S. Dollar and Euro borrowings and U.S. Dollar investments. We invest primarily on a variable-rate basis and we borrow on both a fixed and variable basis. In order to maintain a certain ratio of fixed to variable rate debt, from time to time, depending on market conditions, Viatris will use derivative financial instruments such as interest rate swaps to fix interest rates on variable-rate borrowings or to convert fixed-rate borrowings to variable interest rates.
As of December 31, 2021, Viatris’ outstanding fixed rate borrowings consist principally of $20.60 billion notional amount of senior U.S. dollar and Euro notes. Generally, the fair value of fixed interest rate debt will decrease as interest rates rise and increase as interest rates fall. As of December 31, 2021, the fair value of our outstanding fixed rate senior U.S. dollar and Euro notes was approximately $22.01 billion. A 100 basis point change in interest rates on Viatris’ variable rate debt, net of interest rate swaps, would result in a change in interest expense of approximately $18.4 million per year.
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