Sonic 2008 Annual Report Download - page 60

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Quantitative and Qualitative Disclosures About Market Risk
Sonic’s use of debt directly exposes the company to interest rate risk. Floating rate debt, where the interest
rate fluctuates periodically, exposes the company to short-term changes in market interest rates. Fixed rate
debt, where the interest rate is fixed over the life of the instrument, exposes the company to changes in market
interest rates reflected in the fair value of the debt and to the risk that the company may need to refinance
maturing debt with new debt at a higher rate. Sonic is also exposed to market risk from changes in commodity
prices. Sonic does not utilize financial instruments for trading purposes. Sonic manages its debt portfolio to
achieve an overall desired position of fixed and floating rates and may employ interest rate swaps as a tool to
achieve that goal in the future.
Interest Rate Risk. Our exposure to interest rate risk at August 31, 2008 is primarily based on the fixed rate
notes with an effective rate of 5.7%, before amortization of debt-related costs. At August 31, 2008, the fair
value of the fixed rate notes was estimated at $517.3 million versus carrying value of $574.2 million (including
accrued interest). The difference between fair value and carrying value is attributable to interest rate decreases
subsequent to when the debt was originally issued, more than offset by the increase in credit spreads required
by issuers of similar debt instruments in the current market. Should interest rates and/or credit spreads increase
or decrease by one percentage point, the estimated fair value of the fixed rate notes would decrease by
approximately $15.4 million or increase by approximately $16.0 million, respectively. The variable funding notes
outstanding at August 31, 2008 totaled $185.0 million, with a variable rate of 3.69%. The annual impact on our
results of operations of a one-point interest rate change for the balance outstanding at year-end would be
approximately $1.9 million before tax. We have made certain loans to our franchisees totaling $5.7 million as
of August 31, 2008. The interest rates on these notes are generally between 5.0% and 10.5%. We believe the
carrying amount of these notes approximates their fair value.
Commodity Price Risk. The company and its franchisees purchase certain commodities such as beef, potatoes,
chicken and dairy products. These commodities are generally purchased based upon market prices established
with vendors. These purchase arrangements may contain contractual features that limit the price paid by
establishing price floors or caps; however, we have not made any long-term commitments to purchase any
minimum quantities under these arrangements. We do not use financial instruments to hedge commodity prices
because these purchase agreements help control the ultimate cost.
This market risk discussion contains forward-looking statements. Actual results may differ materially from
this discussion based upon general market conditions and changes in financial markets.
Managemen' Discuio  Anali  nancia Condo  Resu  Operaon
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Sonic Corp. 2008 Annual Report