Does Budget use interest rate caps as derivative instruments?
Budget Franchise · 2025 FDDAnswer from 2025 FDD Document
e approximates the fair value of this debt (Level 2 inputs). The carrying amounts of cash and cash equivalents, available-for-sale securities, receivables, program cash, and accounts payable and other current liabilities approximate fair value due to the short-term maturities of these assets and liabilities.
Our derivative assets and liabilities consist principally of currency exchange contracts, interest rate swaps, interest rate caps and commodity contracts, and are carried at fair value based on significant Our cervative assets and nabilities consist principally or currency excritange contracts, interest rate swaps, interest rate caps and commonly contracts, and are carried at rail valid based or significant observable inputs (Level 2 inputs). Derivatives entered into by us are typically executed over-the-counter and are valued using internal valuation techniques, as no quoted market prices exist for such observable inputs (Level 2 inputs). Derivatives entered into by us are typically executed over-the-counter and are valued using internal valuation techniques, as no quoted market prices exist for such observable inputs. The valuation technique and inputs depend on the type of derivative and the nature of the underlying exposure. We principally use discounted cash flows to value these instruments. These models take into account a variety of factors including, where applicable, maturity, currency exchange rates, our interest rate yield curves and counterparties, credit curves, counterparty creditworthiness and commodity prices. These factors are applied on a consistent basis and are based upon observable inputs where available.
Derivative Instruments
Derivative instruments are used as part of our overall strategy to manage exposure to market risks associated with fluctuations in currency exchange rates, interest rates and fuel costs. As a matter of policy, derivatives are not used for trading or speculative purposes.
All derivatives are recorded at fair value either as assets or liabilities. Changes in fair value of derivatives not designated as hedging instruments are recognized currently in earnings within the same line item as the hedged item. The changes in fair value of a derivative that is designated as either a cash flow or net investment hedge is recorded as a component of accumulated other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transcript affects earnings and is presented in the same income statement line item as the earnings effect of the hedged item. Amounts related to our derivative instruments are recognized in the Consolidated Statements of Cash Flows consistent with the nature of the hedged item (principally operating activities).
Currency Transactions
Currency gains and losses resulting from foreign currency transactions are generally included in operating expenses within the Consolidated Statements of Operations; however, the net gain or loss of currency transactions on intercompany loans and the unrealized gain or loss on intercompany loan hedges are included within interest expense related to corporate debt, net.
Self-Insurance Reserves
The Consolidated Balance Sheets include $451 million and $397 million of liabilities associated with retained risks of liability to third parties as of December 31, 2024 and 2023, respectively. Such liabilities relate primarily to public liability and third-party property damage claims, as well as claims arising from the sale of anciliary insurance products including, but not limited to, supplemental liability, personal effects protection and personal accident insurance. These obligations represent an estimate for both reported claims not yet paid and claims incurred but not yet reported. The estimated reserve requirements for such claims are recorded on an undiscounted basis utilizing actuarial methodologies and various assumptions which include, but are not limited to, our historical loss experience and projected loss development factors.
Source: Item 21 — FINANCIAL STATEMENTS (FDD page 79)
What This Means (2025 FDD)
According to Budget's 2025 Franchise Disclosure Document, Budget utilizes interest rate caps as derivative instruments to manage interest rate risk. These instruments are part of Budget's overall strategy to manage exposure to market risks associated with fluctuations in currency exchange rates, interest rates, and fuel costs. Budget's policy prohibits the use of derivatives for trading or speculative purposes. These derivative assets and liabilities, including interest rate caps, are reported at fair value.
The FDD indicates that Budget both purchases and sells interest rate caps. As of December 31, 2024, Budget sold $8.9 billion of interest rate caps and purchased approximately $3.1 billion. The Avis Budget Rental Car Funding subsidiary also purchased $5.8 billion in interest rate caps, though these are not consolidated by Budget. In 2024, Budget recorded a gain of $2 million related to interest rate caps that were not designated as hedging instruments.
For a potential Budget franchisee, this indicates that Budget actively manages its financial risks using sophisticated financial instruments. While franchisees may not directly engage in these activities, understanding that Budget employs such strategies can provide insight into the company's financial management practices. The use of interest rate caps suggests that Budget is proactive in mitigating the impact of interest rate fluctuations on its debt and overall financial performance.
Prospective franchisees might want to inquire about how Budget's risk management strategies could indirectly affect franchise operations, especially in scenarios involving shared financial resources or company-wide financial performance targets. Understanding the potential implications of these strategies can help franchisees better assess the stability and financial health of the Budget franchise system.