Hertz 2007 Annual Report Download - page 180

HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Note 13—Financial Instruments
Financial instruments, which potentially subject us to concentrations of credit risk, consist principally of
cash equivalents, short term investments and trade receivables. We place our cash equivalents and
short term investments with a number of financial institutions and investment funds to limit the amount of
credit exposure to any one financial institution. Concentrations of credit risk with respect to trade
receivables are limited due to the large number of customers comprising our customer base, and their
dispersion across different businesses and geographic areas. As of December 31, 2007, we had no
significant concentration of credit risk.
Cash and Equivalents and Restricted Cash
Fair value approximates cost indicated on the balance sheet at December 31, 2007 because of the
short-term maturity of these instruments.
Debt
For borrowings with an initial maturity of 93 days or less, fair value approximates carrying value because
of the short-term nature of these instruments. For all other debt, fair value is estimated based on quoted
market rates as well as borrowing rates currently available to us for loans with similar terms and average
maturities. The aggregate fair value of all debt at December 31, 2007 approximated $11.7 billion,
compared to its aggregate carrying value of $12.0 billion. The aggregate fair value of all debt at
December 31, 2006 approximated $12.5 billion, compared to its aggregate carrying value of
$12.4 billion.
Derivative Instruments and Hedging Activities
We utilize certain derivative instruments to enhance our ability to manage risk relating to cash flow and
interest rate exposure. Derivative instruments are entered into for periods consistent with the related
underlying exposures. We document all relationships between hedging instruments and hedged items,
as well as our risk-management objectives and strategies for undertaking various hedge transactions.
Interest Rate Risk
From time to time, we enter into interest rate swap agreements to manage interest rate risk.
In connection with the Acquisition and the issuance of $3,550.0 million of floating rate U.S. Fleet Debt,
HVF entered into certain interest rate swap agreements, or the ‘‘HVF Swaps,’’ effective December 21,
2005, which qualify as cash flow hedging instruments in accordance with SFAS No. 133. These
agreements mature at various terms, in connection with the scheduled maturity of the associated debt
obligations, through November 2010. Under these agreements, HVF pays monthly interest at a fixed rate
of 4.5% per annum in exchange for monthly amounts at one-month LIBOR, effectively transforming the
floating rate U.S. Fleet Debt to fixed rate obligations. HVF paid $44.8 million to reduce the fixed interest
rate on the swaps from the prevailing market rates to 4.5%. Ultimately, this amount will be recognized as
additional interest expense over the remaining terms of the swaps, which range from approximately 1 to
3 years. For year ended December 31, 2007, we recorded an expense of $20.4 million in our
consolidated statement of 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
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