Hertz 2007 Annual Report Download - page 119

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.
In connection with the remaining e7.6 million untendered balance of our Euro Medium Term Notes, we
entered into an interest rate swap agreement on December 21, 2005, effective January 16, 2006, and
maturing on July 16, 2007. The purpose of this interest rate swap is to lock in the interest cash outflows at
a fixed rate of 4.1% on the variable rate Euro Medium Term Notes. On June 30, 2007, the remaining notes
outstanding and related interest rate swap agreements pursuant to the Euro Medium Term Note
Program were repaid in full and expired, respectively.
In May 2006, in connection with the forecasted issuance of the permanent take-out international asset-
based facilities, HIL purchased two swaptions for e3.3 million, to protect itself from interest rate
increases. These swaptions gave HIL the right, but not the obligation, to enter into three year interest rate
swaps, based on a total notional amount of e600 million at an interest rate of 4.155%. The swaptions
were renewed twice in 2007, prior to their scheduled expiration dates of March 15, 2007 and
September 5, 2007, at a total cost of e2.7 million, and now expire on June 5, 2008.
See Notes 3 and 13 to the Notes to our consolidated financial statements included in this Annual Report
under the caption ‘‘Item 8—Financial Statements and Supplementary Data.’’
We have a significant amount of debt (including under our U.S. and International Fleet Debt and Senior
ABL Facility) with variable rates of interest based generally on LIBOR, EURIBOR or their equivalents for
local currencies plus an applicable margin. Increases in interest rates could therefore significantly
increase the associated interest payments that we are required to make on this debt.
We have assessed our exposure to changes in interest rates by analyzing the sensitivity to our earnings
assuming various changes in market interest rates. Assuming a hypothetical increase of one percentage
point in interest rates on our debt portfolio as of December 31, 2007, our net income would decrease by
an estimated $9.9 million over a twelve-month period.
Consistent with the terms of the agreements governing the respective debt obligations, we may hedge a
portion of the floating rate interest exposure under the Senior Credit Facilities and the U.S. and
International Fleet Debt to provide protection in respect of such exposure.
Foreign Currency Risk
We manage our foreign currency risk primarily by incurring, to the extent practicable, operating and
financing expenses in the local currency in the countries in which we operate, including making fleet and
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