v2.4.0.6
Derivative Instruments And Hedging Activities
 9 Months Ended
Nov. 30, 2011
Derivative Instruments And Hedging Activities [Abstract]  
Derivative Instruments And Hedging Activities

6. Derivative Instruments and Hedging Activities

Risk Management Objective of Using Derivatives. We are exposed to certain risks arising from both our business operations and economic conditions, particularly with regard to future issuances of fixed-rate debt and existing and future issuances of floating-rate debt. Primary exposures include LIBOR and other rates used as benchmarks in our securitizations. We enter into derivative instruments to manage exposures that arise from business activities that result in the future known receipt or payment of uncertain cash amounts, the value of which are determined by interest rates. Our derivative instruments are used to manage differences in the amount of our known or expected cash receipts and our known or expected cash payments principally related to the funding of our auto loan receivables.

We do not anticipate significant market risk from derivatives as they are predominantly used to match funding costs to the use of the funding. However, disruptions in the credit markets could impact the effectiveness of our hedging strategies.

Credit risk is the exposure to nonperformance of another party to an agreement. We mitigate credit risk by dealing with highly rated bank counterparties.

Cash Flow Hedges of Interest Rate Risk. Our objectives in using interest rate derivatives are to add stability to interest expense, to manage our exposure to interest rate movements and to better match funding costs to the interest received on the fixed-rate receivables being securitized. To accomplish these objectives, we primarily use interest rate swaps. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. These interest rate swaps are designated as cash flow hedges of forecasted interest payments in anticipation of permanent funding in the term securitization market.

For derivatives that are designated and qualify as cash flow hedges, the effective portion of changes in the fair value is initially recorded in accumulated other comprehensive loss ("AOCL") and is subsequently reclassified into CAF income in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in CAF income.

Amounts reported in AOCL related to derivatives will be reclassified into CAF income as interest expense is incurred on our future issuances of fixed-rate debt. During the next 12 months, we estimate that an additional $12.2 million will be reclassified as a decrease to CAF income.

During the nine months ended November 30, 2011, we entered into the following interest rate derivatives that were designated as cash flow hedges of interest rate risk:

  Nine Months Ended November 30, 2011
 
        Initial Notional
  Number of     Amount
Product Instruments Initial Term   (in thousands)
Interest rate swaps 16 46 months $ 1,935,000

 


As of November 30, 2011, we had the following outstanding derivatives that were designated as cash flow hedges:

  As of November 30, 2011    
        Current
        Notional
  Number of     Amount
Product Instruments Remaining Term   (in thousands)
Interest rate swaps 10 46 months $ 957,000
 

Non-designated Hedges. Derivative instruments not designated as accounting hedges, including interest rate swaps and interest rate caps, are not speculative. These instruments are used to limit risk for investors in the warehouse facilities, to minimize the funding costs related to certain securitization vehicles and to mitigate interest rate risk associated with related financial instruments. Changes in the fair value of derivatives not designated as accounting hedges are recorded directly in CAF income.

During the nine months ended November 30, 2011, we entered into the following interest rate derivatives that were not designated as accounting hedges:

  Nine Months Ended November 30, 2011
        Initial
        Notional
  Number of     Amount
Product Instruments Initial Term   (in thousands)
Interest rate caps (1) 2 53 months $ 0

 

(1) Includes one asset derivative and one liability derivative with offsetting initial notional amounts of $20.1 million.

As of November 30, 2011, we had the following outstanding derivatives that were not designated as accounting hedges:

  As of November 30, 2011    
        Current
        Notional
  Number of     Amount
Product Instruments Remaining Term   (in thousands)
Interest rate swaps 4 14 to 21 months $ 87,801
Interest rate caps (1) 12 21 to 50 months $ 0

 

(1) Includes six asset derivatives and six liability derivatives with offsetting notional amounts of $887.9 million.

Fair Values of Derivative Instruments on the Consolidated Balance Sheets. The tables below present the fair value of our derivative instruments as well as their classification on the consolidated balance sheets. Additional information on fair value measurements is included in Note 7.

DERIVATIVES DESIGNATED AS ACCOUNTING HEDGES

                     
      As of November 30     As of February 28
(In thousands) Location   2011     2010     2011     2010
Asset derivatives:                        
Interest rate swaps Other current assets $ 530   $ 0   $ 2,105   $ 0
Interest rate swaps Accounts payable   0     603     0     0
Liability derivatives:                        
Interest rate swaps Accounts payable   (469 )   (274 )   (1,093 )   0
Total   $ 61   $ 329   $ 1,012   $ 0

 

 

DERIVATIVES NOT DESIGNATED AS ACCOUNTING HEDGES

                   
      As of November 30     As of February 28  
(In thousands) Location   2011     2010     2011     2010  
Asset derivatives:                          
Interest rate swaps Other current assets $ 526   $ 1,267   $ 1,136   $ 1,279  
Interest rate caps Other current assets   304     700     778     1,999  
Liability derivatives:                          
Interest rate swaps Accounts payable   (699 )   (3,595 )   (2,742 )   (7,171 )
Interest rate caps Other current assets   (303 )   (700 )   (779 )   (1,982 )
Total   $ (172 ) $ (2,328 ) $ (1,607 ) $ (5,875 )

 

Effect of Derivative Instruments on the Consolidated Statements of Earnings. The tables below present the effect of the company's derivative instruments on the consolidated statements of earnings for the nine months ended November 30, 2011 and 2010.

DERIVATIVES DESIGNATED AS ACCOUNTING HEDGES

               
    Three Months Ended   Nine Months Ended
    November 30   November 30
(In thousands)   2011   2010   2011   2010
Interest rate swaps:                
Loss recognized in AOCL (1) $ 1,244 $ 2,571 $ 18,362 $ 11,059
Loss reclassified from AOCL into CAF Income (1) $ 2,258 $ 750 $ 4,353 $ 1,049
Loss recognized in CAF Income (2) $ 0 $ 0 $ 0 $ 4

 

(1) Represents the effective portion.

(2) Represents the ineffective portion and amount excluded from effectiveness testing.

DERIVATIVES NOT DESIGNATED AS ACCOUNTING HEDGES

                   
      Three Months Ended     Nine Months Ended  
      November 30     November 30  
(In thousands) Location   2011     2010     2011     2010  
Gain on interest rate swaps CAF Income $ 291   $ 1,621   $ 1,387   $ 2,941  
Net periodic settlements and accrued                          
interest CAF Income   (299 )   (1,658 )   (1,470 )   (7,120 )
Total   $ (8 ) $ (37 ) $ (83 ) $ (4,179 )