American Home Shield 2008 Annual Report Download - page 65

Table of Contents
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
The economy and its impact on discretionary consumer spending, labor wages, fuel prices, fertilizer and other material costs, home re-sales,
unemployment rates, insurance costs and medical costs could have a material adverse impact on future results of operations.
The Company does not hold or issue derivative financial instruments for trading or speculative purposes. The Company has entered into specific
financial arrangements, primarily interest rate swaps and fuel hedges, in the normal course of business to manage certain market risks, with a policy of
matching positions and limiting the terms of contracts to relatively short durations. The effect of derivative financial instrument transactions could have a
material impact on the Company's financial statements.
In August 2007, the Company entered into three, 3-year interest rate swap agreements, effective September 4, 2007. The total notional amount of the
agreements was $530 million. Under the terms of these agreements, the Company pays a weighted average fixed rate of 5.05% on the $530 million notional
amount and the Company will receive a floating rate of interest (based on one month LIBOR) on the notional amount. Therefore, the effective interest rate for
$530 million of the Company's floating rate debt is fixed at approximately 7.55%, including the borrowing margin of 2.50% at December 31, 2008.
In February 2008, the Company entered into two, 3-year interest rate swap agreements and one 4-year interest rate swap agreement, effective March 3,
2008. The total notional amount of the 3-year agreements was $250 million and the total notional amount of the 4-year swap agreement was $250 million.
Under the terms of the agreements, the Company will pay a weighted average fixed rate of interest of approximately 3.15% on the $250 million notional
amount of 3-year swap agreements and 3.48% on the 4-year swap agreement. The Company will receive a floating rate of interest (based on three month
LIBOR) on the notional amount. Therefore, the effective interest rate for $500 million of the term loans is fixed at a rate between 5.65% and 5.98%, including
the borrowing margin at December 31, 2008.
In August 2008, the Company entered into two 3-year interest rate swap agreements effective September 2, 2008. The total notional amount of the swap
agreements was $200 million. Under the terms of the agreements, the Company will pay a weighted average fixed rate of interest of approximately 3.83% on
the $200 million notional amount of the swap agreements. The Company will receive a floating rate of interest (based on one month LIBOR) on the notional
amount. Therefore, the effective interest rate for $200 million of the term loans is fixed at a rate of approximately 6.33%, including the borrowing margin at
December 31, 2008.
In September 2008, the Company entered into a 4-year interest rate swap agreement effective October 1, 2008. The notional amount of the swap
agreement was $200 million. Under the terms of the agreement, the Company will pay a weighted average fixed rate of interest of 3.53% on the $200 million
notional amount of the swap agreement. The Company will receive a floating rate of interest (based on one month LIBOR) on the notional amount. Therefore,
the effective interest rate for $200 million of the term loans is fixed at a rate of approximately 6.03%, including the borrowing margin at December 31, 2008.
In accordance with SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", these interest rate swap agreements are classified as
cash flow hedges and, as such, the hedging instruments are recorded on the balance sheet as either an asset or liability at fair value, with the effective portion
of the changes in fair value attributable to the hedged risks recorded in other comprehensive income.
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