Hertz 2008 Annual Report Download - page 133

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
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.
In connection with the entrance into the HVF Swaps, Hertz entered into seven 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.
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 series,
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 affected facility or series instead of applying those proceeds to purchase
additional cars and/or for working capital purposes. An insurer event of bankruptcy could lead to
consequences that 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 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.
On September 12, 2008, a supplement was signed to the Indenture, dated as of August 1, 2006,
between HVF and the Bank of New York Mellon Trust Company, N.A. This supplement created the
Series 2008-1 Notes for issuance by HVF. In order to satisfy rating agency requirements related to its
bankruptcy-remote status, HVF acquired an interest rate cap in an amount equal to the Series 2008-1
Notes maximum principal amount of $825.0 million with a strike rate of 7% and a term until August 15,
2011. HVF bought the cap on the date the supplement was signed for $0.4 million. In connection with
this interest rate cap, Hertz sold an equal and opposite cap for $0.3 million. The fair value of these
interest rate caps on December 31, 2008 were an asset of $0.3 million and a liability of $0.3 million. The
fair value of these interest rate caps was calculated using a discounted cash flow method and applying
observable market data. Gains and losses resulting from changes in the fair value of these interest rate
caps are included in our results of operations in the periods incurred.
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.’’
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