Does Budget use interest rate swaps as derivative instruments?
Budget Franchise · 2025 FDDAnswer from 2025 FDD Document
ur euro-denominated notes as a hedge of our investment in euro-denominated foreign operations.
The estimated net amount of existing gains or losses we expect to reclassify from accumulated other comprehensive income (loss) to earnings for cash flow and net investment hedges over the next 12 months is not material.
Interest Rate Risk. We use various hedging strategies including interest rate swaps and interest rate caps to create what we deem an appropriate mix of fixed and floating rate assets and liabilities. We use interest rate swaps and interest rate caps to manage the risk related to our floating rate corporate debt and our floating rate vehicle-backed debt. We record the changes in the fair value of our cash flow hedges to other comprehensive income (loss), net of tax, and subsequently reclassify these amounts into earnings in the period during which the hedged transaction affects earnings and is presented in the same income statement line item as the earnings effect of the hedged item. We record the gains or losses related to freestanding derivatives, which are not designated as a hedge for accounting purposes, currently in earnings and are presented in the same line of the income statement expected for the hedged item.
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 swaps as part of its strategy to manage interest rate risk. These swaps are used to achieve a mix of fixed and floating rate assets and liabilities, specifically in relation to floating rate corporate debt and vehicle-backed debt. The changes in the fair value of these cash flow hedges are recorded in other comprehensive income (loss), net of tax, and later reclassified into earnings during the period when the hedged transaction affects earnings.
For instance, Budget has entered into an interest rate swap to hedge $750 million of its interest rate exposure related to a floating rate term loan due in August 2027. The aggregate interest rate for this swap is 3.26%. This indicates that Budget is actively managing its exposure to fluctuating interest rates by using these financial instruments to stabilize borrowing costs.
Furthermore, Budget's derivative assets and liabilities consist of currency exchange contracts, interest rate swaps, interest rate caps, and commodity contracts. These are carried at fair value, reflecting Budget's efforts to manage market risks associated with currency exchange rates, interest rates, and fuel costs. The company's policy prohibits the use of derivatives for trading or speculative purposes, ensuring they are used solely for risk management.