Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
This “Quantitative and Qualitative Disclosures about Market Risk” should be read in conjunction with “Item 7A. Quantitative and Qualitative Disclosures about Market Risk” in the Form 10-K.
As of June 28, 2020, there were no material changes from the information contained in the Form 10-K, except as described below.
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Interest Rate Risk
As of June 28, 2020, the Company had outstanding borrowings of $120.0 million under the 2019-1 Class A-1 Notes. In addition, the Company had outstanding borrowings of $25.0 million under the U.S. advertising fund revolving line of credit and C$5.5 million of outstanding borrowings under a Canadian subsidiary’s revolving credit facility. The increased borrowings were taken as precautionary measures to provide enhanced flexibility considering the uncertain market conditions arising from the COVID-19 pandemic. Subsequent to June 28, 2020, the Company repaid the $120.0 million outstanding balance under the 2019-1 Class A-1 Notes.
Our long-term debt, including the current portion and the advertising fund revolving line of credit, aggregated $2,450.1 million as of June 28, 2020 (excluding unamortized debt issuance costs and the effect of purchase accounting adjustments). The Company’s predominantly fixed-rate debt structure has reduced its exposure to interest rate increases that could adversely affect its earnings and cash flows; however, the 2019-1 Class A-1 Notes and the 2020-1 Class A-1 Notes (collectively, the “Class A-1 Notes”), including the borrowings outstanding under the 2019-1 Class A-1 Notes as of June 28, 2020, accrue interest at a variable interest rate based on (i) the prime rate, (ii) overnight federal funds rates, (iii) the London interbank offered rate (“LIBOR”) for U.S. Dollars or (iv) with respect to advances made by conduit investors, the weighted average cost of, or related to, the issuance of commercial paper allocated to fund or maintain such advances, in each case plus any applicable margin and as specified in the respective purchase agreements for the Class A-1 Notes. In addition, the U.S. advertising fund revolving line of credit bears interest at LIBOR plus 2.75% and our Canadian subsidiary’s revolving credit facility bears interest at the Bank of Montreal Prime Rate. An increase or decrease of 1.0% in the effective interest rate applied to these outstanding borrowings would result in a pre-tax interest expense fluctuation of approximately $1.5 million on an annualized basis. As described above, subsequent to June 28, 2020, the Company repaid the $120.0 million outstanding balance under the 2019-1 Class A-1 Notes. The Company had no outstanding borrowings under the 2020-1 Class A-1 Notes as of June 28, 2020.
In addition, LIBOR is expected to be discontinued after 2021. If LIBOR is discontinued, we may need to renegotiate certain loan documents and we cannot predict what alternative index would be negotiated with our lenders or the resulting impact on our interest expense.
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