Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk primarily from changes in the one-month Secured Overnight Financing Rate ("SOFR"), the benchmark rate for which the interest rate of the majority of our variable-rate indebtedness is based on, and foreign currency exchange rates. These rate changes may affect future income, cash flows and the fair value of the Company, its assets and its liabilities. In certain situations, we may seek to reduce volatility associated with changes in interest rates and foreign currency exchange rates by entering into derivative financial instruments intended to provide a hedge against a portion of the risks associated with such volatility. We continue to have exposure to such risks to the extent they are not hedged. We enter into derivative financial instruments to the extent they meet our objectives to reduce volatility in our results of operations and cash flows, and we do not use derivatives for speculative purposes.
Interest Rate Risk
We are exposed to interest rate risk on our variable-rate indebtedness. Our primary sensitivity in 2024 was to changes in one-month SOFR, as the interest rates on our Term Loans, which represent the majority of our variable-rate indebtedness, were based on this benchmark rate. We use an interest rate swap in order to maintain what we believe to be an appropriate level of exposure to interest rate variability. As of December 31, 2024, we held an interest rate swap for a portion of the Term Loans, through which we receive one-month term SOFR and pay a fixed rate. For our fixed-rate indebtedness, a change in interest rates impacts the fair value but generally does not have an impact on our future results of operations and cash flows.
The following table sets forth the current carrying values of our contractual maturities, total fair values and interest rates as of December 31, 2024 for our financial instruments that are materially affected by interest rate risk, including long-term debt and our interest rate swap:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Maturities by Period | | | | |
| 2025 | | 2026 | | 2027 | | 2028 | | 2029 | | Thereafter | | Carrying Value | | Fair Value |
| (dollars in millions) |
Long-term debt(1): | | | | | | | | | | | | | | | |
Fixed-rate long-term debt | $ | 500 | | | $ | — | | | $ | 600 | | | $ | 500 | | | $ | 1,350 | | | $ | 5,050 | | | $ | 8,000 | | | $ | 7,560 | |
Weighted average fixed interest rate(2) | | | | | | | | | | | | | 4.76 | % | | |
Variable-rate long-term debt | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 3,119 | | | $ | 3,119 | | | $ | 3,140 | |
Variable interest rate(2)(3) | | | | | | | | | | | | | 6.09 | % | | |
Interest rate swap(4): | | | | | | | | | | | | | | | |
Variable to fixed | $ | — | | | $ | 1,600 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 1,600 | | | $ | 45 | |
Variable interest rate receivable(3) | | | | | | | | | | | | | 4.34 | % | | |
Fixed interest rate payable | | | | | | | | | | | | | 1.76 | % | | |
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(1)The carrying values exclude the deduction for unamortized deferred financing costs and any applicable discounts, as well as all finance lease liabilities totaling $117 million as of December 31, 2024.
(2)The weighted average fixed interest rate is the weighted average of the actual rates and the variable interest rate is based on the market rate that was applicable as of December 31, 2024.
(3)The variable interest rate receivable on the interest rate swap excludes the fixed component of the variable interest rate on the long-term debt.
(4)The carrying value reflects the notional amount and the variable interest rate receivable is based on the market rate prevailing as of December 31, 2024. We measure our derivative instruments at fair value and, as of December 31, 2024, our interest rate swap was in an asset position.
Refer to Note 12: "Fair Value Measurements" in our consolidated financial statements for additional information on the fair value measurements of our long-term debt and interest rate swap.
Foreign Currency Exchange Rate Risk
We conduct business in various currencies and are exposed to earnings and cash flow volatility associated with changes in foreign currency exchange rates. Our principal exposure results from management and franchise fees earned in foreign currencies, as well as revenues and expenses from our international leased hotels. The value of these revenues and expenses could change materially in relation to the functional currencies of the exposed entities and to our reporting currency, USD. We also have exposure from our international financial assets and liabilities, including certain intercompany financing arrangements not deemed to be permanently invested, the value of which could change materially in relation to the functional currencies of the exposed entities.
We use foreign currency forward contracts designated as cash flow hedges to offset exposure from foreign currency exchange rate risks associated with certain of our management, franchise and other fees denominated in certain foreign currencies. We use foreign currency forward contracts not designated as hedging instruments to offset exposure to foreign currency exchange rate fluctuations in certain cash and intercompany loan balances. We do not consider the fair value or earnings effect of these foreign currency forward contracts to be material to our consolidated financial statements.
