AutoNation 2006 Annual Report Download - page 40

Table of Contents
 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our primary market risk exposure is increasing LIBOR-based interest rates. Interest rate derivatives may be used to hedge a portion
of the Company’s variable rate debt when appropriate based on market conditions. At December 31, 2006 and 2005, fixed rate debt,
primarily consisting of amounts outstanding under senior unsecured notes, totaled $360.5 million and $371.3 million, respectively, and
had a fair value of $363.4 million and $398.5 million, respectively. Interest rate derivatives may be used to adjust interest rate exposures
when appropriate based upon market conditions.
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At December 31, 2006 and 2005, we had variable rate vehicle floorplan payable totaling $2.3 billion and $2.4 billion, respectively.
Based on these amounts at December 31, 2006 and 2005, a 100 basis point change in interest rates would result in an approximate
$22.7 million and $24.5 million, respectively, change to our annual floorplan interest expense. Our exposure to changes in interest rates
with respect to total vehicle floorplan payable is partially mitigated by manufacturers’ floorplan assistance, which in some cases is based
on variable interest rates.
At December 31, 2006 and 2005, we had other variable rate debt outstanding totaling $1.2 billion and $153.7 million, respectively.
Based on the amounts outstanding at December 31, 2006 and 2005, a 100 basis point change in interest rates would result in an
approximate $12.1 million and $1.5 million change to interest expense, respectively.
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We have utilized interest rate derivatives to hedge portions of our variable rate debt. All of these instruments were designated as cash
flow hedges. During 2006, we had $800.0 million of interest rate hedge instruments mature, consisting of $200.0 million in swaps, which
effectively locked in a LIBOR-based rate of 3.0%, and $600.0 million in collars that capped floating rates to a maximum LIBOR-based
rate no greater than 2.4%. We held no derivative contracts as of December 31, 2006.
We reflect the current fair value of all derivatives on our balance sheet. The related gains or losses on these transactions are deferred
in stockholders’ equity as a component of Accumulated Other Comprehensive Income (Loss). These deferred gains and losses are
recognized in income in the period in which the related items being hedged are recognized in expense. However, to the extent that the change
in value of a derivative contract does not perfectly offset the change in the value of the items being hedged, that ineffective portion is
immediately recognized in income. At December 31, 2005, net unrealized gains related to hedges included in Accumulated Other
Comprehensive Gain (Loss), was $2.1 million. For 2006 and 2005, the income statement impact from interest rate hedges was an
additional income of $1.8 million and $.2 million, respectively.
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