Derivative Financial Instruments

6 Months Ended

Jun. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company and its Affiliates may use derivative financial instruments to offset exposure to changes in interest rates, foreign currency exchange rates and markets.

In 2018, the Company entered into two separate pound sterling-denominated forward foreign currency contracts (the “forward contracts”) with a large financial institution (the “counterparty”). Concurrent to entering into each of the forward contracts, the Company also entered into two separate collar contracts (the “collar contracts”) with the same counterparty for the same notional amounts and expiration dates as each of the forward contracts. The combinations of the forward contracts and the collar contracts were designated as net investment hedges against fluctuations in foreign currency exchange rates on certain of the Company’s investments in Affiliates with the pound sterling as their functional currency.

In the first quarter of 2020, the Company terminated the forward contracts and the corresponding collar contracts, and upon settlement received net proceeds of $24.9 million. The net proceeds from the termination of the contracts are presented within sale of investment securities in the Consolidated Statements of Cash Flows. The Company’s forward contracts and collar contracts with the counterparty were governed by an International Swaps and Derivative Association Master Agreement, which provided for legally enforceable rights to set-off. The terms of the contracts also required the Company and the counterparty to post cash collateral in certain circumstances throughout the duration of the contracts. As of December 31, 2019, the Company held $8.7 million of cash collateral from the counterparty, and the counterparty held no cash collateral from the Company.

In the first quarter of 2020, the Company entered into an interest rate swap contract (the “interest rate swap”) with a financial institution (the “swap counterparty”), which will expire in March 2023. The interest rate swap, which is designated as

a cash flow hedge, is used to exchange the Company’s LIBOR-based interest payments for fixed rate payments. The Company receives payments based on one month LIBOR and makes payments based on an annual fixed rate of 0.5135% on a notional amount of $250.0 million. The terms of the contract also require the Company and the swap counterparty to post cash collateral in certain circumstances throughout the duration of the contract. As of June 30, 2020, the Company held no cash collateral from the swap counterparty, and the swap counterparty held $1.6 million of cash collateral from the Company.

Certain of the Company’s Affiliates use forward foreign currency contracts to hedge the risk of foreign exchange rate movements, which were not significant.

Changes in the fair values of cash flow hedges are reported in Change in net realized and unrealized gain (loss) on derivative financial instruments in the Consolidated Statements of Comprehensive Income. Upon termination of the interest rate swap or the repayment of the Company’s outstanding LIBOR-based borrowings, any gain or loss recorded in Accumulated other comprehensive loss in the Consolidated Balance Sheets will be reclassified into earnings. Changes in the fair values of the effective net investment hedges are reported in Foreign currency translation gain (loss) in the Consolidated Statements of Comprehensive Income. Upon the sale or liquidation of the underlying investment, any gain or loss remaining in Accumulated other comprehensive loss related to the forward and collar contracts will be reclassified to earnings. The Company assesses hedge effectiveness on a quarterly basis.

The following table summarizes the Company’s and its Affiliates’ derivative financial instruments measured at fair value on a recurring basis:



	December 31, 2019					June 30, 2020
	Assets		Liabilities			Assets		Liabilities
Forward contracts	$	23.8	$	(1.0	)	$	1.0	$	(0.6	)
Put options	—		(31.0		)	—			—
Call options	15.1		—			—			—
Interest rate swap	—		—			—			(2.0	)
Total	$	38.9	$	(32.0	)	$	1.0	$	(2.6	)

The forward and collar contracts entered into in 2018 included a set-off right and were therefore, presented on a net basis in Other assets; they were $5.7 million as of December 31, 2019. The Company and certain of its consolidated Affiliates have also entered into contracts that do not include set-off rights and are therefore, presented on a gross basis in Other assets and Other liabilities; they were $2.2 million and $1.0 million, respectively, as of December 31, 2019 and $1.0 million and $2.6 million, respectively, as of June 30, 2020.

The following tables summarize the effects of derivative financial instruments on the Consolidated Statements of Comprehensive Income and the Consolidated Statements of Income:



	For the Three Months Ended June 30,
	2019							2020
	Gain (Loss) Recognized in Other Comprehensive Income (Loss)			Gain Reclassified from Accumulated Other Comprehensive Loss into Earnings		Gain Recognized in Earnings from Excluded Components⁽¹⁾		Loss Recognized in Other Comprehensive Income (Loss)			Gain Reclassified from Accumulated Other Comprehensive Loss into Earnings		Gain (Loss) Recognized in Earnings from Excluded Components⁽¹⁾
Forward contracts	$	26.6		$	0.3	$	3.5	$	(0.5	)	$	0.2	$	—
Put options	(12.3		)	—		—		—				—	—
Call options	(7.6		)	—		—		—				—	—
Interest rate swap	—			—		—		(1.2		)		—	—
Total	$	6.7		$	0.3	$	3.5	$	(1.7	)	$	0.2	$	—



	For the Six Months Ended June 30,
	2019							2020
	Gain (Loss) Recognized in Other Comprehensive Income			Gain Reclassified from Accumulated Other Comprehensive Loss into Earnings		Gain Recognized in Earnings from Excluded Components⁽¹⁾		Gain (Loss) Recognized in Other Comprehensive Income			Gain Reclassified from Accumulated Other Comprehensive Loss into Earnings		Gain Recognized in Earnings from Excluded Components⁽¹⁾
Forward contracts	$	9.8		$	0.2	$	7.0	$	64.5		$	0.3	$	2.8
Put options	5.6			—		—		(47.7		)		—	—
Call options	(15.1		)	—		—		(1.3		)		—	—
Interest rate swap	—			—		—		(2.0		)		—	—
Total	$	0.3		$	0.2	$	7.0	$	13.5		$	0.3	$	2.8

___________________________

⁽¹⁾

The excluded components of the forward contracts were recognized in earnings on a straight-line basis over the respective period of the contracts as a reduction to Interest expense on the Consolidated Statements of Income.