Redbox Financial Statement Analysis

Redbox Overview

Redbox is a division of OuterWall Inc. (purchased by Apollo Global Management Plc in 2016) that offers movie (DVD and Blu-Ray) and video game rental services to customers. It operates automated retail stores in the US, Canada, and Puerto Rico allowing customers to rent a movie or game. The available annual report is for year ended 31st December 2015 (before acquisition).

Interest Rate Risk and Hedging Strategies

From the annual report, Redbox does not use derivative instruments to hedge against fluctuation in foreign exchange rate, interest rates, and inflation. Redbox credit facilities base their interest rates on the LIBOR and prime rate, and fluctuations in these rates significantly affect its interest rate expense. For instance, Redbox acknowledges that a percentage point increase in interest rates would result in the interest expense rising by $1.4 million. Redbox does not identify any instruments to hedge against volatility in interest rates ("Managing interest rate risk with swaps & hedging strategies", 2018). Redbox can use interest rate swaps to minimize the adverse impact on its credit facility portfolio. Interest rate swaps involve the trading and exchange of loan variable and fixed loan structures. For instance, to hedge against a potential rise in interest rates, Redbox can swap its existing loans rates with those of a fixed rate loan that the company will lock in, protecting itself from a future increase.

Foreign Exchange Rate Risk and Hedging Strategies

Redbox also identifies that it is subject to fluctuations in the exchange rate since it has operations outside the U.S. The annual report does not identify any foreign exchange forward contract which Redbox uses. Failure to hedge against foreign exchange rates results in diminished foreign income and affects the overall financial performance. Foreign exchange forward contract are a popular tool to hedge against fluctuations in rates. For instance, to hedge against unfavorable movement in rate in the Canadian rates, Redbox can enter into a forward contract where it agrees to buy Canadian dollars on a agreed future date and at a specified exchange rate.

Conclusion

Therefore, Redbox should seek to use interest rate swaps to hedge against movements in interest rates and forward contracts to manage the impact of movements in foreign exchange rates. It is a concern that Redbox does not use derivatives to hedge against the various risks facing the organization.

References

Managing interest rate risk with swaps & hedging strategies. (2018). Retrieved from https://privatewealth.usbank.com/insights/managing-interest-rate-risk