Hertz 2008 Annual Report Download - page 134

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (Continued)
We have a significant amount of debt (including under our U.S. and International Fleet Debt facilities,
other international fleet debt facilities, International ABS Fleet Financing Facility 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, 2008, our net income would decrease by
an estimated $21.0 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, the U.S. and International
Fleet Debt and International ABS Fleet Financing Facility 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
equipment purchases and borrowing for working capital needs. Also, we have purchased foreign
exchange options to manage exposure to fluctuations in foreign exchange rates for selected marketing
programs. The effect of exchange rate changes on these financial instruments would not materially
affect our consolidated financial position, results of operations or cash flows. Our risks with respect to
foreign exchange options are limited to the premium paid for the right to exercise the option and the
future performance of the option’s counterparty. Premiums paid for options outstanding as of
December 31, 2008, were approximately $0.5 million, and we limit counterparties to financial institutions
that have strong credit ratings. As of December 31, 2008 and December 31, 2007, the fair value of all
outstanding foreign currency options was approximately $0.5 million and $0.1 million, respectively,
which was recorded in our consolidated balance sheet in ‘‘Prepaid expenses and other assets.’’ The fair
value of the foreign currency options 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 options are
included in our results of operations.
We also manage exposure to fluctuations in currency risk on intercompany loans we make to certain of
our subsidiaries by entering into foreign currency forward contracts at the time of the loans. The forward
rate is reflected in the intercompany loan rate to the subsidiaries, and as a result, the forward contracts
have no material impact on our results of operations.
In connection with the Transactions, we issued e225 million of Senior Euro Notes. Prior to October 1,
2006, our Senior Euro Notes were not designated as a net investment hedge of our Euro-denominated
net investments in our international operations. On October 1, 2006, we designated our Senior Euro
Notes as an effective net investment hedge of our Euro-denominated net investment in our international
operations. As a result of this net investment hedge designation, as of December 31, 2008 and
December 31, 2007, losses of $15.7 million (net of tax of $12.6 million) and $27.8 million (net of tax of
$18.3 million), respectively, attributable to the translation of our Senior Euro Notes into the U.S. dollar are
recorded in our consolidated balance sheet in ‘‘Accumulated other comprehensive income (loss).’’
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