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Debentures | 3 Months Ended
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Nov. 30, 2021
Debt Disclosure [Abstract] |
Debentures | DEBENTURES 1.75% Convertible Debentures On September 1, 2020, Hamblin Watsa Investment Counsel Ltd., in its capacity as investment manager of Fairfax Financial Holdings Limited ("Fairfax"), and another institutional investor invested in the Company through a $365 million private placement of new debentures (the “1.75% Debentures”), which replaced $605 million of debentures issued in a private placement on September 7, 2016 (the “3.75% Debentures”) as described below (collectively, the “Debentures”). Due to the conversion option and other embedded derivatives within the 1.75% Debentures, and consistent with the Company’s accounting for the 3.75% Debentures, the Company has elected to record the 1.75% Debentures, including the debt itself and all embedded derivatives, at fair value and present the 1.75% Debentures as a single hybrid financial instrument. No portion of the fair value of the 1.75% Debentures has been recorded as equity, nor would be if the embedded derivatives were bifurcated from the host debt contract. Each period, the fair value of the 1.75% Debentures is recalculated and resulting gains and losses from the change in fair value of the Debentures associated with non-credit components are recognized in income, while the change in fair value associated with credit components is recognized in accumulated other comprehensive loss (“AOCL”). The fair value of the Debentures has been determined using the significant Level 2 inputs interest rate curves and any observable trades of the Debentures that may have occurred during the period, the market price and volatility of the Company’s listed common shares, and the significant Level 3 inputs related to credit spread and the implied discount of the 1.75% Debentures at issuance. The Company originally determined its credit spread by calibrating to observable trades of the 3.75% Debentures and trending the calibrated spread to valuation dates utilizing an appropriate credit index. The Company’s credit spread was determined to be 7.90% as of the issuance date of the 1.75% Debentures and 6.27% as of November 30, 2021. An increase in credit spread will result in a decrease in the fair value of 1.75% Debentures and vice versa. The fair value of the 1.75% Debentures on September 1, 2020 was determined to be approximately $456 million and the implied discount approximately $91 million. The Company determined the implied discount on the 1.75% Debentures by calculating the fair value of the 1.75% Debentures on September 1, 2020 utilizing the above credit spread and other inputs described above. The following table summarizes the change in fair value of the 1.75% Debentures for the nine months ended November 30, 2021, which also represents the total changes through earnings of items classified as Level 3 in the fair value hierarchy:
|  | As at
|  | November 30, 2021 |
Balance as at February 28, 2021 |  | $ | 720 |  |
Change in fair value of the Debentures |  | (47) |  |
Balance as at November 30, 2021 |  | $ | 673 |  |
The difference between the fair value of the 1.75% Debentures and the unpaid principal balance of $365 million is $308 million. The following table shows the impact of the changes in fair value of the 1.75% Debentures for the three and nine months ended November 30, 2021 and November 30, 2020:
|  | Three Months Ended |  | Nine Months Ended
|  | November 30, 2021 |  | November 30, 2020 |  | November 30, 2021 |  | November 30, 2020
Income (charge) associated with the change in fair value from non-credit components recorded in the consolidated statements of operations |  | $ | 110 |  |  | $ | (89) |  |  | $ | 47 |  |  | $ | (89) |
Charge associated with the change in fair value from instrument-specific credit components recorded in AOCL |  | (1) |  |  | (5) |  |  | — |  |  | (5) |
Total decrease (increase) in the fair value of the 1.75% Debentures |  | $ | 109 |  |  | $ | (94) |  |  | $ | 47 |  |  | $ | (94) |
For the three and nine months ended November 30, 2021, the Company recorded interest expense related to the Debentures of $2 million and $5 million, respectively, which has been included in investment income (loss), net on the Company’s consolidated statements of operations (three and nine months ended November 30, 2020 - $2 million and $13 million). Fairfax, a related party under U.S. GAAP due to its beneficial ownership of common shares in the Company after taking into account potential conversion of the Debentures, owned $500 million principal amount of the 3.75% Debentures and purchased $330 million principal amount of the 1.75% Debentures. As such, the redemption of Fairfax’s portion of the 3.75% Debentures, the investment by Fairfax in the 1.75% Debentures and the payment of interest on the Debentures to Fairfax represent related party transactions. Fairfax receives interest at the same rate as other holders of the Debentures. 3.75% Convertible Debentures On September 7, 2016, Fairfax and other institutional investors invested in the Company through a $605 million private placement of the 3.75% Debentures. On July 22, 2020, the Company announced that, with the required approval of the holders of the 3.75% Debentures, it would redeem the 3.75% Debentures for a redemption amount of approximately $615 million (the “Redemption Amount”), which would settle all outstanding obligations of the Company in respect of the 3.75% Debentures. The redemption was completed on September 1, 2020. As the Redemption Amount represented fair value at August 31, 2020 and the Company elected the fair value option for the 3.75% Debentures, the impact to the consolidated statements of operations of the redemption on the fair value was recorded in the second quarter of fiscal 2021. The following table shows the impact of the changes in fair value of the 3.75% Debentures for the three and nine months ended November 30, 2021 and November 30, 2020:
|  | Three Months Ended |  | Nine Months Ended
|  | November 30, 2021 |  | November 30, 2020 |  | November 30, 2021 |  | November 30, 2020
Charge associated with the change in fair value from non-credit components recorded in the consolidated statements of operations |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (19) |
Income associated with the change in fair value from instrument-specific credit components recorded in AOCL |  | — |  |  | — |  |  | — |  |  | 15 |
Realized charges associated with the change in fair value from credit components recorded in the consolidated statements of operations on redemption |  | — |  |  | (6) |  |  | — |  |  | (6) |
Realized charges associated with the change in fair value from credit components released from AOCL on redemption |  | — |  |  | 6 |  |  | — |  |  | 6 |
Total increase in the fair value of the 3.75% Debentures |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (4) |

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- Definition The entire disclosure for long-term debt. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 470 -URI http://asc.fasb.org/topic&trid=2208564 + Details
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