5.	Derivative Instruments

The Company was not party to any derivative instruments in 2018.

In the first quarter of 2019, the Company entered into eight fixed pay/receive variable interest rate swaps (the “Swaps”).

Six of the Swaps were entered into by the LLC Borrowers and have reduced notional amounts that mirror the amortization under the six Term Loans entered into by the LLC Borrowers, effectively converting each of the six Term Loans from variable to fixed rate. Each of these six Swaps extend for the duration of the corresponding Term Loan, with maturities from 2020 through 2025.

The other two Swaps were entered into by the Company and have notional amounts that total $50 million and extend through the maturity of the Credit Facility in February of 2023.

The Company entered into the Swaps in order to reduce its exposure to the risk of increased interest rates. With respect to the six Swaps entered into by the LLC Borrowers, it was deemed necessary so that the anticipated cash flows of such entities, which arise entirely from the lease rents for the aircraft owned by such entities, would be sufficient to make the required loan principal and interest payments, thereby preventing default so long as the lessees met their lease rent obligations. The two Swaps entered into by the parent company protect against the exposure to interest rate increases on $50 million of the Company’s Credit Facility debt.

The Company estimates the fair value of derivative instruments using a discounted cash flow technique and uses creditworthiness inputs that corroborate observable market data evaluating the Company’s and counterparties’ risk of non-performance. Valuation of the derivative instruments requires certain assumptions for underlying variables and the use of different assumptions would result in a different valuation. Management believes it has applied assumptions consistently during the period. The Company applies hedge accounting for seven of its eight swaps and accounts for the change in fair value of its cash flow hedges through other comprehensive income for all derivative instruments.

The Company has designated seven of the Swaps as cash flow hedges. Changes in the fair value of the hedged swaps are included in other comprehensive income, which amounts are reclassified into earnings in the period in which the transaction being hedged affects earnings. One of the Swaps is not eligible under its terms for hedge treatment. Changes in fair value of non-hedge derivatives are reflected in earnings in the periods in which they occur. As such, the Company has reflected the following amounts in its income and other comprehensive income amounts:

Change in value of Swaps	$	408,400
Other items		(1,300	)
Included in interest expense	$	407,100

The following amount was included in other comprehensive income, before tax:

Change in value of hedged Swaps	$	(544,800	)

Amounts included in other comprehensive income will be reclassified into earnings in the period in which the hedged item affects earnings, i.e. with future settlements of the Swaps. None of the current balance of accumulated other comprehensive income is expected to be reclassified in the next twelve months.

At March 31, 2019, the fair value of the Company’s Swaps was as follows:

Designated interest rate hedges fair value	$	(895,800	)
Other interest rate swap		(45,200	)
Total derivative (liability)	$	(941,000	)

The Company evaluates the creditworthiness of the counterparties under its hedging agreements. The swap counterparties for the Swaps are large financial institutions in the United States that possessed an investment grade credit rating. Based on this rating, the Company believes that the counterparties were creditworthy and that their continuing performance under the hedging agreements was probable.