Hertz 2009 Annual Report Download - page 176

HERTZ GLOBAL HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
change in fair value of the HVF Swaps is recorded in ‘‘Accumulated other comprehensive loss.’’ As of
December 31, 2009 and 2008, the balance reflected in ‘‘Accumulated other comprehensive loss,’’ net of
tax, was a loss of $49.7 million (net of tax of $31.8 million) and a loss of $89.6 million (net of tax of
$57.4 million), respectively. The fair values of the HVF Swaps were calculated using the income
approach and applying observable market data (i.e. the 1-month LIBOR yield curve and credit default
swap spreads).
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 ABS Base Indenture) 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.
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 and in an associated
transaction, Hertz sold an equal and opposite cap for $0.3 million. In connection with the issuance of the
Series 2009-1 Notes, HVF caused the termination of the Series 2008-1 Notes, as well as both of the
associated interest rate caps.
On September 18, 2009, HVF completed the closing of the Series 2009-1 Notes. In order to satisfy rating
agency requirements related to its bankruptcy-remote status, HVF purchased an interest rate cap, for
$11.7 million, with a maximum notional amount equal to the Series 2009-1 Notes maximum principal
amount of $2.1 billion with a strike rate of 5% and a term until January 25, 2013. Additionally, Hertz sold a
5% interest rate cap, for $6.5 million, with a notional amount equal to 33.3% of the notional amount of the
HVF cap through January 2012, and then subsequently with a matching notional amount to the HVF cap
through its maturity date of January 25, 2013. 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.
In May 2006, in connection with the forecasted issuance of the permanent take-out international asset-
based facilities, our subsidiary 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 expired on June 5, 2008. The fair values of the HIL
swaptions were calculated using the income approach and applying observable market data. On
June 4, 2008, these swaptions were sold for a realized gain of e9.4 million (or $14.8 million). Additionally,
156