In connection with the Carrols Acquisition, what benchmark interest rate is utilized by the receive-variable, pay-fixed interest rate swap assumed by Burger King, and what is the termination date of this swap?
Burger_King Franchise · 2025 FDDAnswer from 2025 FDD Document
as net investment hedges. We use derivatives to manage our exposure to fluctuations in interest rates and currency exchange rates.
Interest Rate Swaps
At December 31, 2024, we had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $3,500 million to hedge the variability in the interest payments on a portion of our Term Loan Facilities, including any subsequent refinancing or replacement of the Term Loan Facilities, beginning August 31, 2021 through the termination date of October 31, 2028. Additionally, at December 31, 2024, we also had outstanding receive-variable, pay-fixed interest rate swaps with a total notional value of $500 million
Source: Item 20 — OUTLETS AND FRANCHISEE INFORMATION (FDD pages 109–124)
What This Means (2025 FDD)
According to Burger King's 2025 Franchise Disclosure Document, in connection with the Carrols Acquisition, Burger King assumed a receive-variable, pay-fixed interest rate swap that utilizes SOFR (Secured Overnight Financing Rate) as the benchmark interest rate. The purpose of this swap is to hedge the variability in interest payments on a portion of their Term Loan Facilities. The total notional value of this swap is $120 million.
This interest rate swap is designated as a cash flow hedge for hedge accounting purposes. This means that the unrealized changes in the market value of the swap are recorded in Accumulated Other Comprehensive Income (AOCI), net of tax, and then reclassified into interest expense during the period in which the hedged forecasted transaction affects earnings. This accounting treatment helps to smooth out the impact of interest rate fluctuations on Burger King's financial statements.
The termination date for this particular interest rate swap is February 28, 2025. This means that the hedging arrangement will be in effect until that date, providing Burger King with a degree of protection against interest rate volatility during that time. For a prospective franchisee, this information provides insight into how Burger King manages its financial risks and obligations, which can be an indicator of the company's overall financial health and stability.