Derivative Instruments

9 Months Ended

Sep. 30, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Interest Rate Swaps / Caps

The Company enters into derivative agreements to manage interest rate risk exposure. Interest rate swap agreements are utilized to limit the Company's exposure to interest rate risk by converting a portion of its floating-rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense. Interest rate swaps involve the receipt of floating-rate amounts in exchange for fixed-rate interest payments over the lives of the agreements without an exchange of the underlying principal amounts. These swaps are designated as cash flow hedges for accounting purposes and accordingly, changes in the fair value are recorded in accumulated other comprehensive income (loss) and reclassified to interest and debt expense when they are realized.

The Company has entered into offsetting $500.0 million notional interest rate cap agreements with substantially similar economic terms related to certain debt facility requirements. These derivatives are not designated as hedging instruments, and because they offset, changes in fair value have an immaterial impact on the financial statements.

The counterparties to these agreements are highly rated financial institutions. In the unlikely event that the counterparties fail to meet the terms of these agreements, the Company's exposure is limited to the interest rate differential on the notional amount at each monthly settlement period over the life of the agreements. The Company does not anticipate any non-performance by the counterparties.

Certain assets of the Company's subsidiaries are pledged as collateral for various ABS facilities and the amounts payable under certain derivative agreements. Additionally, the Company may be required to post cash collateral on certain derivative agreements if the fair value of these contracts represents a liability. Any amounts of cash collateral posted are included in Other assets on the consolidated balance sheet and are presented in operating activities of the consolidated statements of cash flows. As of September 30, 2022, the Company posted cash collateral on derivative instruments of $3.7 million.

During the nine months ended September 30, 2022, the company terminated the following derivative instruments (in millions):


Derivative Instrument	Date Terminated	Notional Amount	Funds Received (Paid)(1)
Interest rate swap	January 11, 2022	$150.0	$6.0
Interest rate swap	January 11, 2022	$150.0	$6.1
Interest rate cap	April 27, 2022	$200.0	$0.3
Interest rate cap	April 27, 2022	$200.0	$0.2
Interest rate swap	April 29, 2022	$62.5	$1.4
Interest rate swap	April 29, 2022	$100.0	$1.6
Interest rate swap	April 29, 2022	$100.0	$0.9
Interest rate swap	September 20, 2022	$186.1	$2.5

(1) For interest rate swaps that were originally designated as cash flow hedges, the amounts in accumulated other comprehensive income (loss) will be amortized to debt and interest expense in the consolidated statements of operations over the remaining term of the derivative instruments at time of termination.

Within the next twelve months, we expect to reclassify $35.6 million of net unrealized and realized gains related to derivative instruments designated as cash flow hedges from accumulated other comprehensive income (loss) into earnings.

On September 30, 2022, the Company entered into an interest rate swap agreement with a scheduled maturity date of September 30, 2025. This contract is indexed to 1 month term SOFR, has a fixed rate of 3.82%, and has a notional amount of $200.0 million.

As of September 30, 2022, the Company had derivative instruments in place to fix or limit the floating interest rates on a portion of the borrowings under its debt facilities as summarized below:

Derivatives

Notional Amount (in millions)

Weighted Average
Fixed Leg (Pay) Interest Rate

Weighted Average
Remaining Term

Interest Rate Swap(1)

$1,339.8

2.22%

4.2 years

(1) Excludes certain interest rate swaps with an effective date in a future period ("forward starting swaps"). Including these instruments will increase total notional amount by $350.0 million and increase the weighted average remaining term to 5.5 years.

The following table summarizes the impact of derivative instruments on the consolidated statements of operations and the consolidated statements of comprehensive income on a pretax basis (in thousands):


		Three Months Ended September 30,				Nine Months Ended September 30,
	Financial statement caption	2022		2021		2022		2021
Non-Designated Derivative Instruments


Realized (gains) losses	Debt termination expense	$	—	$	—	$	—	$	883

Unrealized (gains) losses	Unrealized (gain) loss on derivative instruments, net	$	19	$	—	$	(320)	$	—

Designated Derivative Instruments
Realized (gains) losses	Interest and debt (income) expense	$	(2,313)	$	7,583	$	7,403	$	22,592
Unrealized (gains) losses	Comprehensive (income) loss	$	(53,866)	$	(8,176)	$	(169,315)	$	(49,298)

Fair Value of Derivative Instruments

The Company has elected to use the income approach to value its interest rate swap and cap agreements, using Level 2 market expectations at the measurement date and standard valuation techniques to convert future values to a single discounted present value. The Level 2 inputs for the interest rate swap and cap valuations are inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR and swap rates and credit risk at commonly quoted intervals). In

response to the expected phase out of LIBOR, the Company continues to work with its counterparties to identify an alternative reference rate. Substantially all of the Company's debt agreements already include transition language, and the Company also adopted various practical expedients which will facilitate the transition.The Company presents the fair value of derivative financial instruments on a gross basis as a separate line item on the consolidated balance sheet. As of September 30, 2022 and December 31, 2021, the Company has no material non-designated instruments.