Hertz 2008 Annual Report Download - page 201

HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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 Insurance Corporation or Ambac Assurance Corporation 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. 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 an unrealized loss of
$12.0 million and a realized gain of $9.8 million, which was 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.
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
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