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Financial Instruments
3 Months Ended
Mar. 31, 2016
Investments, All Other Investments [Abstract]  
Financial Instruments
Financial Instruments

Derivative Instruments and Hedging Activities
Currency Risk. The Company uses currency exchange contracts to manage its exposure to changes in currency exchange rates associated with its non-U.S.-dollar denominated receivables and forecasted royalties, forecasted earnings of non-U.S. subsidiaries and forecasted non-U.S.-dollar denominated acquisitions. The Company primarily hedges a portion of its current-year currency exposure to the Australian, Canadian and New Zealand dollars, the Euro and the British pound sterling. The majority of forward contracts do not qualify for hedge accounting treatment. The fluctuations in the value of these forward contracts do, however, largely offset the impact of changes in the value of the underlying risk they economically hedge. Forward contracts used to hedge forecasted third-party receipts and disbursements up to 12 months are designated and do qualify as cash flow hedges. The Company has designated its 6% Euro-denominated notes as a hedge of its investment in Euro-denominated foreign operations.
The amount of gains or losses reclassified from other comprehensive income (loss) to earnings resulting from ineffectiveness or from excluding a component of the hedges’ gain or loss from the effectiveness calculation for cash flow and net investment hedges during the three months ended March 31, 2016 and 2015, was not material, nor is the amount of gains or losses the Company expects to reclassify from accumulated other comprehensive income (loss) to earnings over the next 12 months.

Interest Rate Risk. The Company uses various hedging strategies including interest rate swaps and interest rate caps to create an appropriate mix of fixed and floating rate assets and liabilities. The Company uses interest rate swaps and interest rate caps to manage the risk related to its floating rate corporate debt and its floating rate vehicle-backed debt. The Company records the effective portion of changes in the fair value of its cash flow hedges to other comprehensive income (loss), net of tax, and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized. The Company records the gains or losses related to freestanding derivatives, which are not designated as a hedge for accounting purposes, in its consolidated results of operations. The changes in fair values of hedges that are determined to be ineffective are immediately reclassified from accumulated other comprehensive income (loss) into earnings. There was no ineffectiveness related to the Company’s cash flow hedges during the three months ended March 31, 2016 and 2015. The Company estimates that $7 million of losses currently recorded in accumulated other comprehensive income (loss) will be recognized in earnings over the next 12 months.

The Company enters into derivative commodity contracts to manage its exposure to changes in the price of unleaded gasoline. Changes in the fair value of these derivatives are recorded within operating expenses.

The Company held derivative instruments with absolute notional values as follows:
 
As of March 31, 2016
Interest rate caps (a)
$
8,674

Interest rate swaps
1,850

Foreign exchange contracts
1,054

 
 
Commodity contracts (millions of gallons of unleaded gasoline)
14

__________
(a) 
Represents $6.9 billion of interest rate caps sold, partially offset by approximately $1.8 billion of interest rate caps purchased. These amounts exclude $5.1 billion of interest rate caps purchased by the Company’s Avis Budget Rental Car Funding subsidiary as it is not consolidated by the Company.

Fair values (Level 2) of derivative instruments were as follows: 
 
 
As of March 31, 2016
 
As of December 31, 2015
 
 
Fair Value,
Asset
Derivatives
 
Fair Value,
Liability
Derivatives
 
Fair Value,
Asset
Derivatives
 
Fair Value,
Liability
Derivatives
Derivatives designated as hedging instruments
 
 
 
 
 
 
 
 
Interest rate swaps (a)
$

 
$
8

 
$
1

 
$
5

 
 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments
 
 
 
 
 
 
 
 
Interest rate caps (b)

 
3

 
1

 
5

 
Foreign exchange contracts (c)
4

 
32

 
16

 
2

 
Commodity contracts (c)

 
1

 

 
1

 
Total
$
4

 
$
44

 
$
18

 
$
13

__________
Amounts in this table exclude derivatives issued by Avis Budget Rental Car Funding; however, certain amounts related to the derivatives held by Avis Budget Rental Car Funding are included within accumulated other comprehensive income (loss).
(a) 
Included in other non-current assets or other non-current liabilities.
(b) 
Included in assets under vehicle programs or liabilities under vehicle programs.
(c) 
Included in other current assets or other current liabilities.

The effects of derivatives recognized in the Company’s Consolidated Condensed Financial Statements were as follows:
 
 
Three Months Ended 
 March 31,
 
 
2016
 
2015
Derivatives designated as hedging instruments (a)
 
 
 
 
Interest rate swaps
$
(3
)
 
$
(3
)
 
Euro-denominated notes
(14
)
 
37

Derivatives not designated as hedging instruments (b)
 
 
 
 
Foreign exchange contracts (c)
(10
)
 
35

 
Commodity contracts (d)
(2
)
 

 
Total
$
(29
)
 
$
69

__________
(a) 
Recognized, net of tax, as a component of other comprehensive income (loss) within stockholders’ equity.
(b) 
Gains (losses) related to derivative instruments are expected to be largely offset by (losses) gains on the underlying exposures being hedged.
(c) 
For the three months ended March 31, 2016, included a $9 million gain in interest expense and a $19 million loss in operating expense. For the three months ended March 31, 2015, included a $21 million gain in interest expense and $14 million gain in operating expense.
(d) 
Included in operating expense.

Debt Instruments

The carrying amounts and estimated fair values (Level 2) of debt instruments were as follows: 
 
 
As of March 31, 2016
 
As of December 31, 2015
 
 
Carrying
Amount
 
Estimated
Fair
Value
 
Carrying
Amount
 
Estimated
Fair
Value
Corporate debt
 
 
 
 
 
 
 
 
Short-term debt and current portion of long-term debt
$
327

 
$
332

 
$
26

 
$
26

 
Long-term debt
3,511

 
3,505

 
3,435

 
3,478

 
 
 
 
 
 
 
 
 
Debt under vehicle programs
 
 
 
 
 
 
 
 
Vehicle-backed debt due to Avis Budget Rental Car Funding
$
7,623

 
$
7,675

 
$
6,796

 
$
6,836

 
Vehicle-backed debt
2,235

 
2,248

 
2,060

 
2,071

 
Interest rate swaps and interest rate caps (a)
3

 
3

 
4

 
4

 __________
(a) 
Derivatives in a liability position.