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Derivative Instruments | 9 Months Ended
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Sep. 30, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments | Derivative Instruments In the normal course of business, our operations are exposed to economic risks from interest rates and foreign currency exchange rates. We may enter into derivative financial instruments to offset these underlying economic risks. Derivative Designated as Hedging Instruments - Cash Flow Hedges In order to hedge the foreign currency risk associated with interest payments on intercompany loans denominated in British Pound Sterling ("GBP") and Euro ("EUR"), we have a hedging strategy to enter into foreign currency forward contracts to sell GBP, USD, and EUR and buy EUR, USD, and GBP. These foreign currency forwards are designated as cash flow hedges. Forward points on the forward contracts are included in the assessment of hedge effectiveness. Amounts reported in other comprehensive income related to foreign currency derivative contracts will be reclassified to other gain and (loss) in the same period during which the hedged forecasted transactions affect earnings. To add stability to interest expense and to manage our exposure to interest rate movements associated with our term loans, we executed variable-to-fixed interest rate swaps. These interest rate swaps are designated as cash flow hedges. The interest rate swaps are recorded on the consolidated balance sheets at fair value. Changes to fair value are recorded to accumulated other comprehensive income, or AOCI, and subsequently reclassified into interest expense in the same periods during which the hedged transaction affects earnings. To mitigate the impact of fluctuating interest rates, we have also entered into interest rate swaption agreements, structured as a swaption corridor, in anticipation of issuing USD denominated bonds. Interest rate swaption corridors are a combination of two swaption positions, whereby we purchase a payer swaption, which is an option that allows us to enter into a swap where we will pay the fixed rate and receive the floating rate of the swap, and sell a payer swaption, which is an option that provides the counterparty with the right to enter into a swap where we will receive the fixed rate and pay the floating rate of the swap. For the swaption corridor entered into during March 2023, the combination of purchasing the payer swaption and selling the swaption resulted in a premium being paid of $7.6 million. The interest rate swaptions are designated as cash flow hedges. Changes in fair value of the swaptions have been recorded in AOCI. Derivative Designated as Hedging Instruments - Fair Value Hedges Periodically, we enter into and designate fixed-to-floating interest rate swaps as fair value hedges. The purpose of these swaps is to manage interest rate risk by managing our mix of fixed-rate and variable-rate debt. These swaps involve the receipt of fixed-rate amounts for variable interest rate payments over the life of the swaps without exchange of the underlying principal amount. We also designate some of our cross-currency swaps as fair value hedges. The purpose of these contracts is to hedge foreign currency risk associated with changes in spot rates on foreign-denominated debt. For these hedges, we have elected to exclude the change in fair value of the cross-currency swaps related to both time value and cross-currency basis spread from the assessment of hedge effectiveness (the "excluded component"). Changes in the fair value of the cross-currency swaps attributable to changes in the spot rates on the final notional exchanges and changes in the value of the hedged assets due to changes in the spot rates are recorded in 'Foreign currency and derivative (loss) gain, net'. Changes in the fair value of the cross-currency swaps attributable to the excluded components are recorded to other comprehensive income and will be recognized in 'Foreign currency and derivative (loss) gain, net' on a systematic and rational basis, as net cash settlements and interest accruals on the respective cross currency swaps occur, over the remaining life of the hedging instruments. Derivatives Not Designated as Hedging Instruments We enter into foreign currency exchange swap agreements to reduce the effects of currency exchange rate fluctuations between the USD, our reporting currency, and GBP and EUR. These derivative contracts generally mature within one year and are not designated as hedge instruments for accounting purposes. As the currency exchange swap is not accounted for as a hedging instrument, the change in fair value is recorded in earnings through the caption entitled 'Foreign currency and derivative (loss) gain, net' in the consolidated statements of income and comprehensive income. The following table summarizes the terms and fair values of our derivative financial instruments at September 30, 2023 and December 31, 2022 (dollars in millions):
Derivative Type | Number of Instruments(1) |  | Notional Amount as of | Weighted Average Strike Rate (2) | Maturity Date (3) | Fair Value - asset (liability) as of
Derivatives Designated as Hedging Instruments | September 30, 2023 |  | December 31, 2022 |  |  | September 30, 2023 |  | December 31, 2022
Interest rate swaps | 9 |  | $ | 1,630.0 |  |  | $ | 250.0 | 4.26% | Jan 2024 - Jan 2026 | $ | 1.3 |  |  | $ | 5.6 |
Interest rate swaptions | 6 |  | 1,000.0 |  |  | — |  | (4) | Feb 2034 | 21.7 |  |  | — |
Cross-currency swaps | 3 |  | 320.0 |  |  | 320.0 | (5) | Oct 2032 | (38.6) |  |  | (33.3) |
Foreign currency forwards | 26 |  | 160.7 |  |  | 185.5 | (6) | Oct 2023 - Dec 2024 | 10.1 |  |  | 16.1 |
|  |  | $ | 3,110.7 |  |  | $ | 755.5 |  |  |  | $ | (5.5) |  |  | $ | (11.6) |
Derivatives not Designated as Hedging Instruments |  |  |  |  |  |  |  |
Currency exchange swaps | 6 |  | $ | 1,650.6 |  |  | $ | 2,427.7 | (7) | Oct 2023 | $ | 6.6 |  |  | $ | 58.8 |
Cross-currency swaps | 3 |  | 280.0 |  |  | 280.0 | (5) | Oct 2032 | (34.7) |  |  | (29.5) |
|  |  | $ | 1,930.6 |  |  | $ | 2,707.7 |  |  |  | $ | (28.1) |  |  | $ | 29.3 |
Total of all Derivatives | $ | 5,041.3 |  |  | $ | 3,463.2 |  |  |  | $ | (33.6) |  |  | $ | 17.7 |
(1)This column represents the number of instruments outstanding as of September 30, 2023. (2)Weighted average strike rate is calculated using the notional value as of September 30, 2023. (3)This column represents maturity dates for instruments outstanding as of September 30, 2023. (4)Represent purchased payer swaptions with a strike rate of 3.75% and sold payer swaptions with a strike rate of 4.25%. (5)USD fixed rate of 5.625% and EUR weighted average fixed rate of 4.697%. (6)Weighted average forward GBP-USD exchange rate of 1.31. (7)Weighted average EUR-GBP exchange rates each of 0.86. We measure our derivatives at fair value and include the balances within other assets and accounts payable as well as accrued expenses on our consolidated balance sheets. We have agreements with each of our derivative counterparties containing provisions under which we could be declared in default on our derivative obligations if repayment of our indebtedness is accelerated by the lender due to our default. The following table summarizes the amount of unrealized gain (loss) on derivatives in other comprehensive income (in thousands):
|  |  |  | Three months ended September 30, |  | Nine months ended September 30,
Derivatives in Cash Flow Hedging Relationships |  |  |  |  |  | 2023 |  | 2022 |  | 2023 |  | 2022
Cross-currency swaps |  |  |  |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (5,091) |
Interest rate swaps |  |  |  |  |  | (7,172) |  |  | 30,838 |  |  | (5,328) |  |  | 100,229 |
Foreign currency forwards |  |  |  |  |  | 3,156 |  |  | 11,076 |  |  | (6,039) |  |  | 23,920 |
Interest rate swaptions |  |  |  |  |  | 15,126 |  |  | — |  |  | 18,679 |  |  | — |
Total derivatives in cash flow hedging relationships |  |  |  |  |  | $ | 11,110 |  |  | $ | 41,914 |  |  | $ | 7,312 |  |  | $ | 119,058 |
Derivatives in Fair Value Hedging Relationships |  |  |  |  |  |  |  |  |  |  |  |
Cross-currency swaps |  |  |  |  |  | $ | (3,917) |  |  | $ | — |  |  | $ | (8,691) |  |  | $ | — |
Total derivatives in fair value hedging relationships |  |  |  |  |  | $ | (3,917) |  |  | $ | — |  |  | $ | (8,691) |  |  | $ | — |
Total unrealized gain (loss) on derivatives |  |  |  |  |  | $ | 7,193 |  |  | $ | 41,914 |  |  | $ | (1,379) |  |  | $ | 119,058 |
The following table summarizes the amount of gain (loss) on derivatives reclassified from AOCI (in thousands):
|  |  |  |  |  | Three months ended September 30, |  | Nine months ended September 30,
Derivatives in Cash Flow Hedging Relationships |  | Location of Gain (Loss) Recognized in Income |  |  |  |  |  | 2023 |  | 2022 |  | 2023 |  | 2022
Cross-currency swaps |  | Foreign currency and derivative (loss) gain, net |  |  |  |  |  | $ | — |  |  | $ | 2,784 |  |  | $ | — |  |  | $ | 30,425 |
Interest rate swaps |  | Interest expense |  |  |  |  |  | 5,316 |  |  | (1,286) |  |  | 10,055 |  |  | (5,969) |
Foreign currency forwards |  | Foreign currency and derivative (loss) gain, net |  |  |  |  |  | 1,662 |  |  | — |  |  | 3,985 |  |  | — |
Interest rate swaptions |  | Interest expense |  |  |  |  |  | (2,250) |  |  | — |  |  | (4,609) |  |  | — |
Total derivatives in cash flow hedging relationships |  |  |  |  |  |  |  | $ | 4,728 |  |  | $ | 1,498 |  |  | $ | 9,431 |  |  | $ | 24,456 |
Derivatives in Fair Value Hedging Relationships |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cross-currency swaps |  | Foreign currency and derivative (loss) gain, net |  |  |  |  |  | $ | 570 |  |  | $ | — |  |  | $ | 1,054 |  |  | $ | — |
Total derivatives in fair value hedging relationships |  |  |  |  |  |  |  | $ | 570 |  |  | $ | — |  |  | $ | 1,054 |  |  | $ | — |
Net increase to net income |  |  |  |  |  |  |  | $ | 5,298 |  |  | $ | 1,498 |  |  | $ | 10,485 |  |  | $ | 24,456 |
We expect to reclassify $9.8 million from AOCI as a decrease to interest expense relating to interest rate swaps and interest rate swaptions and $11.4 million from AOCI to foreign currency gain relating to foreign currency forwards within the next twelve months. The following table details our foreign currency and derivative gains (losses), net included in income (in thousands):
|  |  |  | Three months ended September 30, |  | Nine months ended September 30,
|  |  |  |  |  | 2023 |  | 2022 |  | 2023 |  | 2022
Realized foreign currency and derivative gain (loss), net: |  |  |  |  |  |  |  |  |  |  |  |
Gain on the settlement of undesignated derivatives |  |  |  |  |  | $ | 11,432 |  |  | $ | 4,050 |  |  | $ | 10,106 |  |  | $ | 80,677 |
Gain on the settlement of designated derivatives reclassified from AOCI |  |  |  |  |  | 2,233 |  |  | 2,784 |  |  | 5,039 |  |  | 30,425 |
Gain (loss) on the settlement of transactions with third parties |  |  |  |  |  | 410 |  |  | (111) |  |  | 1,685 |  |  | (41) |
Total realized foreign currency and derivative gain, net |  |  |  |  |  | $ | 14,075 |  |  | $ | 6,723 |  |  | $ | 16,830 |  |  | $ | 111,061 |
Unrealized foreign currency and derivative gain (loss), net: |  |  |  |  |  |  |  |  |  |  |  |
Gain (loss) on the change in fair value of undesignated derivatives |  |  |  |  |  | $ | 12,910 |  |  | $ | (24,488) |  |  | $ | 4,734 |  |  | $ | 35,506 |
Loss on remeasurement of certain assets and liabilities |  |  |  |  |  | (29,798) |  |  | (5,128) |  |  | (16,607) |  |  | (162,570) |
Total unrealized foreign currency and derivative loss, net |  |  |  |  |  | $ | (16,888) |  |  | $ | (29,616) |  |  | $ | (11,873) |  |  | $ | (127,064) |
Total foreign currency and derivative (loss) gain, net |  |  |  |  |  | $ | (2,813) |  |  | $ | (22,893) |  |  | $ | 4,957 |  |  | $ | (16,003) |

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- Definition 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. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent + Details
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