Hertz 2007 Annual Report Download - page 110

operations, in ‘‘Interest, net of interest income,’’ associated with the ineffectiveness of our HVF Swaps.
The ineffectiveness resulted from a decline in the value of the swaps due to a decrease in forward
interest rates along with a decrease in the time value component as we continue to approach the
maturity dates of the swaps. The effective portion of the change in fair value of the swaps is recorded in
‘‘Accumulated other comprehensive income.’’ As of December 31, 2007 and 2006, the balance reflected
in ‘‘Accumulated other comprehensive income,’’ net of tax, was a loss of $45.6 million, and a gain of
$3.5 million, respectively. As of December 31, 2006, the fair value of the HVF Swaps was an asset of
$50.6 million, which is reflected in our consolidated balance sheet in ‘‘Prepaid expenses and other
assets.’’ As of December 31, 2007, the fair value of our HVF Swaps was a liability of $50.2 million, which
is reflected in our consolidated balance sheet in ‘‘Other accrued liabilities.’’
The U.S. Fleet Debt issued on the closing date of the Acquisition has the benefit of financial guaranty
insurance policies under which either MBIA or Ambac will guarantee the timely payment of interest on
and ultimate payment of principal of such notes.
In connection with the entrance into the HVF swaps, Hertz entered into seven differential interest rate
swap agreements, or the ‘‘differential swaps.’’ These differential swaps were required to be put in place
to protect the counterparties to the HVF swaps in the event of an ‘‘amortization event’’ under the asset-
backed notes agreements. In the event of an amortization event, the amount by which the principal
balance on the floating rate portion of the U.S. Fleet Debt is reduced, exclusive of the originally
scheduled amortization, becomes the notional amount of the differential swaps, and is transferred to
Hertz. There was no payment associated with these differential swaps and their notional amounts are
and will continue to be zero unless 1) there is an amortization event, which causes the amortization of the
loan balance, or 2) the debt is prepaid.
An event of bankruptcy (as defined in the indentures governing the U.S. Fleet Debt) with respect to MBIA
or Ambac would constitute an amortization event under the portion of the U.S. Fleet Debt facilities
guaranteed by the affected insurer. In that event we would also be required to apply a proportional
amount, or substantially all in the case of insolvency of both insurers, of all rental payments by Hertz to its
special purpose leasing subsidiary and all car disposal proceeds under the applicable facility, or under
substantially all U.S. Fleet Debt facilities in the case of insolvency of both insurers, to pay down the
amounts owed under the facility or facilities instead of applying those proceeds to purchase additional
cars and/or for working capital purposes. An insurer event of bankruptcy could have a material adverse
effect on our liquidity if we were unable to negotiate mutually acceptable new terms with our U.S. Fleet
Debt lenders or if alternate funding were not available to us.
HVF is subject to numerous restrictive covenants under the ABS Indenture and the other agreements
governing the U.S. Fleet Debt, including restrictive covenants with respect to liens, indebtedness, benefit
plans, mergers, disposition of assets, acquisition of assets, dividends, officers’ compensation,
investments, agreements, the types of business it may conduct and other customary covenants for a
bankruptcy-remote special purpose entity. The U.S. Fleet Debt is subject to events of default and
amortization events that are customary in nature for U.S. rental car asset-backed securitizations of this
type. The occurrence of an amortization event or event of default could result in the acceleration of
principal of the notes and a liquidation of the U.S. car rental fleet.
International Fleet Debt. In connection with the Acquisition, Hertz International, Ltd., or ‘‘HIL,’’ a
Delaware corporation organized as a foreign subsidiary holding company and a direct subsidiary of
Hertz, and certain of its subsidiaries (all of which are organized outside the United States), together with
certain bankruptcy-remote special purpose entities (whether organized as HIL’s subsidiaries or as
non-affiliated ‘‘orphan’’ companies), or ‘‘SPEs,’’ entered into revolving bridge loan facilities providing
commitments to lend, in various currencies an aggregate amount equivalent to approximately
$2,768.9 million (calculated as of December 31, 2007), subject to borrowing bases comprised of rental
vehicles and related assets of certain of HIL’s subsidiaries (all of which are organized outside the United
States) or one or more SPEs, as the case may be, and rental equipment and related assets of certain of
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