Financial Instruments

9 Months Ended

Sep. 30, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 certain of 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 euro-denominated notes as a hedge of its investment in euro-denominated foreign operations.

The estimated net amount of existing gains or losses the Company expects 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. The Company uses various hedging strategies including interest rate swaps and interest rate caps to create what it deems 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 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 affects earnings and is presented in the same income statement line item as the earnings effect of the hedged item. The Company records 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. The Company estimates that approximately $21 million of losses currently recorded in accumulated other comprehensive income (loss) will be recognized in earnings over the next 12 months.

Commodity Risk. The Company periodically enters into derivative commodity contracts to manage its exposure to changes in the price of gasoline. These instruments were designated as freestanding derivatives and the changes in fair value are recorded in earnings and are presented in the same line of the income statement expected for the hedged item.

The Company held derivative instruments with absolute notional values as follows:


	As of September 30, 2021
Foreign exchange contracts	$	1,709
Interest rate caps (a)	8,742
Interest rate swaps	1,550

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(a)Represents $5.9 billion of interest rate caps sold, partially offset by approximately $2.9 billion of interest rate caps purchased. These amounts exclude $3.0 billion of interest rate caps purchased by the Company’s Avis Budget Rental Car Funding subsidiary as it is not consolidated by the Company.

Estimated fair values (Level 2) of derivative instruments were as follows:


		As of September 30, 2021				As of December 31, 2020
		Fair Value, Derivative Assets		Fair Value, Derivative Liabilities		Fair Value, Derivative Assets		Fair Value, Derivative Liabilities
Derivatives designated as hedging instruments
	Interest rate swaps (a)	$	1	$	34	$	—	$	69

Derivatives not designated as hedging instruments
	Foreign exchange contracts (b)	9		6		3		11
	Interest rate caps (c)	1		4		—		—

	Total	$	11	$	44	$	3	$	80

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Amounts in this table exclude derivatives issued by Avis Budget Rental Car Funding, as it is not consolidated by the Company; however, certain amounts related to the derivatives held by Avis Budget Rental Car Funding are included within accumulated other comprehensive income (loss), as discussed in Note 14–Stockholders’ Equity.

(a)Included in other non-current assets or other non-current liabilities.

(b)Included in other current assets or other current liabilities.

(c)Included in assets under vehicle programs or liabilities under vehicle programs.

The effects of derivatives recognized in the Company’s Consolidated Condensed Financial Statements were as follows:


		Three Months Ended September 30,				Nine Months Ended September 30,
		2021		2020		2021		2020
Derivatives designated as hedging instruments (a)
	Interest rate swaps (b)	$	6	$	(7)	$	27	$	(33)
	Euro-denominated notes (c)	19		(32)		42		(34)
Derivatives not designated as hedging instruments (d)
	Foreign exchange contracts (e)	6		(12)		1		14
	Interest rate caps (f)	(1)		(1)		(3)		(2)
	Commodity contracts (g)	—		1		—		(6)
	Total	$	30	$	(51)	$	67	$	(61)

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(a)Recognized, net of tax, as a component of other comprehensive income (loss) within stockholders’ equity.

(b)Classified as a net unrealized gain (loss) on cash flow hedges in accumulated other comprehensive income (loss). Refer to Note 14–Stockholders’ Equity for amounts reclassified from accumulated other comprehensive income into earnings.

(c)Classified as a net investment hedge within currency translation adjustment in accumulated other comprehensive income (loss).

(d)Gains (losses) related to derivative instruments are expected to be largely offset by (losses) gains on the underlying exposures being hedged.

(e)For the three months ended September 30, 2021, included a $7 million gain in interest expense and a $1 million loss in operating expense, and for the nine months ended September 30, 2021, included a $2 million gain in interest expense and a $1 million loss in operating expense. For the three months ended September 30, 2020, included an $10 million loss in interest expense and a $2 million loss in operating expense, and for the nine months ended September 30, 2020, included a $18 million gain in interest expense and a $4 million loss in operating expense.

(f)Included primarily in vehicle interest, net.

(g)Included in operating expense.

Debt Instruments

The carrying amounts and estimated fair values (Level 2) of debt instruments were as follows:


		As of September 30, 2021				As of December 31, 2020
		Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Corporate debt
	Short-term debt and current portion of long-term debt	$	18	$	18	$	19	$	18
	Long-term debt	$	4,009	$	4,170	$	4,191	$	4,337

Debt under vehicle programs
	Vehicle-backed debt due to Avis Budget Rental Car Funding	$	8,117	$	8,350	$	5,080	$	5,317
	Vehicle-backed debt	$	2,629	$	2,650	$	1,775	$	1,796
	Interest rate swaps and interest rate caps (a)	$	3	$	3	$	2	$	2

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(a) Derivatives in a liability position.