Hertz 2008 Annual Report Download - page 124

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
are subject to increase if HIL does not repay borrowings thereunder within specified periods of time and
upon the occurrence of other specified events.
The International Fleet Debt facilities contain a number of covenants (including, without limitation,
covenants customary for transactions similar to the International Fleet Debt facilities) that, among other
things, limit or restrict the ability of our subsidiary, HIL, the borrowers and the other subsidiaries of HIL to
dispose of assets, incur additional indebtedness, incur guarantee obligations, create liens, make
investments, make acquisitions, engage in mergers, make negative pledges, change the nature of their
business or engage in certain transactions with affiliates. In addition, HIL is restricted from making
dividends and other restricted payments (which may include payments of intercompany indebtedness)
in an amount greater than e100 million plus a specified excess cash flow amount calculated by reference
to excess cash flow in earlier periods. Subject to certain exceptions, until such time as 50% of the
commitments under the International Fleet Debt facilities as of the closing date of the Acquisition have
been replaced by permanent take-out international asset-based facilities, the specified excess cash flow
amount will be zero. Thereafter, this specified excess cash flow amount will be between 50% and 100%
of cumulative excess cash flow based on the percentage of the International Fleet Debt facilities that
have been replaced by permanent take-out international asset-based facilities. As a result of the
contractual restrictions on HIL’s ability to pay dividends to Hertz as of December 31, 2008, the restricted
net assets of our consolidated subsidiaries exceeded 25% of our total consolidated net assets.
The subsidiaries conducting the car rental business in certain European jurisdictions may, at their
option, continue to engage in capital lease financings relating to revenue earning equipment outside the
International Fleet Debt facilities. As of December 31, 2008, there were $25.9 million of capital lease
financings outstanding. These capital lease financings are included in the International Fleet Debt total.
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 were due to expire on June 5, 2008. On June 4,
2008, these swaptions were sold for a realized gain of e9.4 million (or $14.8 million). Additionally, on
June 4, 2008, HIL purchased two new swaptions for e8.6 million, to protect itself from interest rate
increases associated with the International ABS Fleet Financing Facility, which closed on July 24, 2008.
These swaptions were based on an underlying transaction with a notional amount of e600 million at an
interest rate of 4.25%. On October 10, 2008, the outstanding swaptions were terminated and Hertz
received a e1.9 million payment from counterparties. As of December 31, 2007, the fair value of the
swaptions was e6.2 million (or $9.2 million), which is reflected in our consolidated balance sheet in
‘‘Prepaid expenses and other assets.’’ The fair value of the HIL swaptions was calculated using a
discounted cash flow method and applying observable market data. During the year ended
December 31, 2008, the fair value adjustments related to these swaptions were a loss of $5.0 million
(unrealized loss on the new swaptions) and a loss of $2.2 million ($9.8 million realized gain on sale of the
old swaptions and a net $12.0 million unrealized loss on the old and new swaptions), respectively, which
were recorded in our consolidated statement of operations in ‘‘Selling, general and administrative’’
expenses. During the years ended December 31, 2007 and 2006, the fair value adjustments 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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