Derivatives and Risk Management
|12 Months Ended|
Dec. 29, 2022
|Derivative Instruments and Hedging Activities Disclosure [Abstract]|
|Derivatives and Risk Management||Derivatives and Risk Management
Interest Rate Risk
The Company’s exposure to market risk from adverse changes in interest rates is primarily associated with its long-term debt obligations, which carry variable interest rates. Market risk associated with the Company’s variable interest rate long-term debt relates to the potential negative impact to future earnings and cash flows from an increase in interest rates.
In an effort to manage exposure to the risk associated with variable interest rate long term debt, the Company periodically enters into interest rate derivative contracts. These interest rate derivative contracts are used to convert the interest rate exposure on a portion of the Company’s debt portfolio from a floating rate to a capped rate and are designated as cash flow hedges.
Derivative Position as of December 29, 2022:
(1)As discussed in Note 10, “Debt,” the Term Loan Facility was amended to transition from an interest rate benchmark based on LIBOR to an interest rate benchmark based on Secured Overnight Financing Rate (“SOFR”). To align with this amendment, the hedged interest rate benchmark index for the interest rate cap contracts was changed from one month LIBOR to one month Term SOFR, and the underlying hedge documentation was updated to reflect this change. As a result of the application of the practical expedients in accordance with ASC 848, Reference Rate Reform, the original hedge designation for the interest cap contracts remains intact, and the Company will continue to apply a qualitative effectiveness assessment method.
Derivative Position as of December 30, 2021:
Designated Hedge Gains
Gains related to designated hedge contracts are as follows:
To manage credit risk associated with the Company’s interest rate hedges, the Company selects counterparties based on their credit ratings and limits exposure to any one counterparty.
The counterparties to the Company’s derivative contracts are financial institutions with investment grade credit ratings. To manage credit risk related to its derivative financial instruments, the Company periodically monitors the credit risk of its counterparties, limits its exposure in the aggregate and to any single counterparty, and adjust its hedging positions, as appropriate. The impact of credit risk, as well as the ability of each party to fulfill its obligations under the derivative financial instruments, is considered in determining the fair value of the contracts. Credit risk has not had a significant effect on the fair value of the Company’s derivative contracts. The Company’s derivative financial instruments do not have any credit risk-related contingent features or collateral requirements.
The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef