Hertz 2007 Annual Report Download - page 181

HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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.’’
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 our Euro Medium Term Notes that were not tendered to us in connection with the
Acquisition, we entered into an interest rate swap agreement on December 21, 2005, effective
January 16, 2006, 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. As the critical
terms of the swap and remaining portion of the Euro Medium Term Notes match, the swap qualified for
cash flow hedge accounting and the shortcut method of assessing effectiveness, in accordance with
SFAS 133. Therefore, the fair value of the swap was carried on the balance sheet, with offsetting gains or
losses recorded in other comprehensive income. 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. As of December 31,
2007 and December 31, 2006, the fair value of the swaptions was e6.2 million (or $9.2 million) and
e1.3 million (or $1.7 million), respectively, which is reflected in our consolidated balance sheet in
‘‘Prepaid expenses and other assets.’’ During the years ended December 31, 2007 and 2006, the fair
value adjustment related to these swaptions was a gain of $3.9 million and a loss of $2.5 million,
respectively, which was recorded in our consolidated statement of operations in ‘‘Selling, general and
administrative’’ expenses.
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