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Derivative Instruments | 9 Months Ended
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Sep. 30, 2024
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. Derivatives Designated as Hedging Instruments - Cash Flow Hedges We enter into foreign currency forward contracts to sell GBP and EUR and buy USD to hedge the foreign currency risk associated with interest payments on intercompany loans denominated in GBP and EUR. Forward points on the forward contracts are included in the assessment of hedge effectiveness. We also execute variable-to-fixed interest rate swaps to add stability to interest expense and to manage our exposure to interest rate movements associated with our term loans and may also enter into interest rate swaption agreements. Derivatives Designated as Hedging Instruments - Fair Value Hedges Periodically, we enter into and designate fixed-to-floating interest rate swaps 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 as we use them to hedge foreign currency risk associated with changes in spot rates on foreign-denominated debt. For these hedging instruments, 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 these excluded components are recorded to other comprehensive income and subsequently 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 Designated as Hedging Instruments - Net Investment Hedges To mitigate the foreign currency exchange rate variations associated with our investment in EUR-denominated foreign operations, we may enter into derivative instruments, such as cross-currency swaps that qualify as net investment hedges under the criteria prescribed in accordance with ASC Topic 815-20, Hedging - General. We use the spot method of assessing hedge effectiveness and apply the consistent election to the excluded component by recognizing changes in the fair value of the hedging instruments attributable to the excluded component in the same manner as described above. Any difference between the change in the fair value of the excluded components and the amounts recognized in earnings is reported in other comprehensive income as part of the foreign cumulative translation adjustment. The gain or loss on the portion of the derivative instruments included in the assessment of effectiveness is reported in other comprehensive income as part of the 'Foreign currency translation adjustment' line item, to the extent the relationship is highly effective. If our net investment changes during a reporting period, the hedge relationship will be assessed for whether a de-designation is warranted (only if the hedge notional amount is outside of prescribed tolerance). Further, certain EUR-denominated bonds and borrowings under our Revolving Credit Facility and Term Loans (all as defined in notes 7 and 8, respectively) may be also designated as, and are effective as, net investment hedges. Changes in the value of such borrowings, related to changes in the spot rates, will be recorded in the same manner as foreign currency translation adjustments. As of September 30, 2024, the total principal amount of foreign currency debt obligations designated as net investment hedges was $60.1 million. 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 our consolidated statements of income and comprehensive income. The following table summarizes the terms and fair values of our derivative financial instruments at September 30, 2024 and December 31, 2023 (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, 2024 |  | December 31, 2023 |  |  | September 30, 2024 |  | December 31, 2023
Interest rate swaps (4) | 12 |  | $ | 2,680.0 |  |  | $ | 1,630.0 | 3.71% | Jun 2025 - Aug 2027 | $ | 13.9 |  |  | $ | 0.3 |
Interest rate swaptions (5) | — |  | — |  |  | 1,000.0 |  | — |  | — |  |  | 2.6 |
Cross-currency swaps - Fair Value | 3 |  | 320.0 |  |  | 320.0 | (6) | Oct 2032 | (59.5) |  |  | (59.8) |
Cross-currency swaps - Net Investment | 3 |  | 280.0 |  |  | 280.0 | (7) | Oct 2032 | (52.8) |  |  | (53.2) |
Foreign currency forwards | 31 |  | 357.6 |  |  | 162.3 | (8) | Oct 2024 - Jun 2026 | (15.2) |  |  | 2.7 |
|  |  | $ | 3,637.6 |  |  | $ | 3,392.3 |  |  |  | $ | (113.6) |  |  | $ | (107.4) |
Derivatives not Designated as Hedging Instruments |  |  |  |  |  |  |  |
Currency exchange swaps | 3 |  | $ | 1,251.0 |  |  | $ | 1,810.6 | (9) | Oct 2024 | $ | (28.9) |  |  | $ | 8.9 |
|  |  | $ | 1,251.0 |  |  | $ | 1,810.6 |  |  |  | $ | (28.9) |  |  | $ | 8.9 |
Total of all Derivatives | $ | 4,888.6 |  |  | $ | 5,202.9 |  |  |  | $ | (142.5) |  |  | $ | (98.5) |
(1)This column represents the number of instruments outstanding as of September 30, 2024. (2)Weighted average strike rate is calculated using the notional value as of September 30, 2024. (3)This column represents maturity dates for instruments outstanding as of September 30, 2024. (4)During the nine months ended September 30, 2024, we entered into five variable-to-fixed interest rate swaps when we extended maturity of the 2023 term loans and designated them as cash flow hedges. We also designated five variable-to-fixed interest rate swaps we acquired from Spirit as cash flow hedges to mitigate the interest rate risk associated with the term loans we assumed in conjunction with our merger with Spirit. The acquisition date fair value of these derivatives was $35.1 million in total and will be reclassified from AOCI to interest expense over the remaining life of the term loans. (5)There were six interest swaptions equal to $1 billion in notional entered into in March 2023, of which $800 million was terminated in January 2024 in connection with a senior unsecured note issuance. A total termination premium of $3.4 million we received was deferred in other comprehensive income and will be recognized in interest expense over the 10-year tenor of the notes due 2034. The remaining swaption of the $200 million notional expired in January 2024. (6)USD fixed rate of 5.625% and EUR weighted average fixed rate of 4.681%. (7)USD fixed rate of 5.625% and EUR weighted average fixed rate of 4.716%. (8)Weighted average forward GBP-USD exchange rate of 1.28. (9)Weighted average exchange rates of 0.84 for EUR-GBP and 1.31 for GBP-USD. We measure our derivatives at fair value and include the balances within 'Other assets, net' and 'Accounts payable and 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 and foreign currency translation adjustments in other comprehensive income (in thousands):
| Three months ended September 30, |  | Nine months ended September 30, |  |
Derivatives in Cash Flow Hedging Relationships | 2024 |  | 2023 |  | 2024 |  | 2023 |  |
Interest rate swaps | $ | (30,051) |  |  | $ | (7,172) |  |  | $ | (18,206) |  |  | $ | (5,328) |  |  |
Foreign currency forwards | (17,414) |  |  | 3,156 |  |  | (17,947) |  |  | (6,039) |  |  |
Interest rate swaptions | 640 |  |  | 15,126 |  |  | 2,284 |  |  | 18,679 |  |  |
Total derivatives in cash flow hedging relationships | $ | (46,825) |  |  | $ | 11,110 |  |  | $ | (33,869) |  |  | $ | 7,312 |  |  |
Derivatives in Fair Value Hedging Relationships |  |  |  |  |  |  |  |  |
Cross-currency swaps - Fair Value | $ | 351 |  |  | $ | (3,917) |  |  | $ | 3,641 |  |  | $ | (8,691) |  |  |
Total derivatives in fair value hedging relationships | $ | 351 |  |  | $ | (3,917) |  |  | $ | 3,641 |  |  | $ | (8,691) |  |  |
Total unrealized (loss) gain on derivatives, net | $ | (46,474) |  |  | $ | 7,193 |  |  | $ | (30,228) |  |  | $ | (1,379) |  |  |
Derivatives and Non-derivatives in Net Investment Hedging Relationships |  |  |  |  |  |  |  |  |
Cross-currency swaps - Net Investment | $ | (12,715) |  |  | $ | — |  |  | $ | (1,094) |  |  | $ | — |  |  |
Foreign currency debt | (2,232) |  |  | — |  |  | (2,232) |  |  | — |  |  |
Total unrealized loss recorded in foreign currency translation adjustment | $ | (14,947) |  |  | $ | — |  |  | $ | (3,326) |  |  | $ | — |  |  |
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 Recognized in Income | 2024 |  | 2023 |  | 2024 |  | 2023 |  |
Interest rate swaps |  | Interest | $ | 8,316 |  |  | $ | 5,316 |  |  | $ | 25,836 |  |  | $ | 10,055 |  |  |
Foreign currency forwards |  | Foreign currency and derivative (loss) gain, net | 739 |  |  | 1,662 |  |  | 4,419 |  |  | 3,985 |  |  |
Interest rate swaptions |  | Interest | 82 |  |  | (2,250) |  |  | (827) |  |  | (4,609) |  |  |
Total derivatives in cash flow hedging relationships |  |  | $ | 9,137 |  |  | $ | 4,728 |  |  | $ | 29,428 |  |  | $ | 9,431 |  |  |
Derivatives in Fair Value Hedging Relationships |  |  |  |  |  |  |  |  |  |  |
Cross-currency swaps - Fair Value |  | Foreign currency and derivative (loss) gain, net | $ | 98 |  |  | $ | 570 |  |  | $ | 1,097 |  |  | $ | 1,054 |  |  |
Total derivatives in fair value hedging relationships |  |  | $ | 98 |  |  | $ | 570 |  |  | $ | 1,097 |  |  | $ | 1,054 |  |  |
Derivatives in Net Investment Hedging Relationships |  |  |  |  |  |  |  |  |  |  |
Cross-currency swaps - Net Investment (excluded component) |  | Foreign currency and derivative (loss) gain, net | $ | 549 |  |  | $ | — |  |  | $ | 2,356 |  |  | $ | — |  |  |
Total derivatives in net investment hedging relationships |  |  | $ | 549 |  |  | $ | — |  |  | $ | 2,356 |  |  | $ | — |  |  |
Net increase to net income |  |  | $ | 9,784 |  |  | $ | 5,298 |  |  | $ | 32,881 |  |  | $ | 10,485 |  |  |
We expect to reclassify $5.5 million from AOCI as a decrease to interest expense relating to interest rate swaps 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, |  |
| 2024 |  | 2023 |  | 2024 |  | 2023 |  |
Realized foreign currency and derivative (loss) gain, net: |  |  |  |  |  |  |  |  |
(Loss) gain on the settlement of undesignated derivatives | $ | (34,164) |  |  | $ | 11,432 |  |  | $ | (54,548) |  |  | $ | 10,106 |  |  |
Gain on the settlement of designated derivatives reclassified from AOCI | 1,386 |  |  | 2,233 |  |  | 7,872 |  |  | 5,039 |  |  |
(Loss) gain on the settlement of transactions with third parties | (18) |  |  | 410 |  |  | (33) |  |  | 1,685 |  |  |
Total realized foreign currency and derivative (loss) gain, net | $ | (32,796) |  |  | $ | 14,075 |  |  | $ | (46,709) |  |  | $ | 16,830 |  |  |
Unrealized foreign currency and derivative (loss) gain, net: |  |  |  |  |  |  |  |  |
(Loss) gain on the change in fair value of undesignated derivatives | $ | (28,915) |  |  | $ | 12,910 |  |  | $ | (23,369) |  |  | $ | 4,734 |  |  |
Gain (loss) on remeasurement of certain assets and liabilities | 60,039 |  |  | (29,798) |  |  | 72,963 |  |  | (16,607) |  |  |
Total unrealized foreign currency and derivative gain (loss), net | $ | 31,124 |  |  | $ | (16,888) |  |  | $ | 49,594 |  |  | $ | (11,873) |  |  |
Total foreign currency and derivative (loss) gain, net | $ | (1,672) |  |  | $ | (2,813) |  |  | $ | 2,885 |  |  | $ | 4,957 |  |  |

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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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