Derivative Financial Instruments

6 Months Ended

Jun. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

9. DERIVATIVE FINANCIAL INSTRUMENTS

The sole objective of our use of derivative financial instruments is to minimize the risks and/or costs associated with our investments and/or financing transactions. These derivatives may or may not qualify as net investment, cash flow, or fair value hedges under the hedge accounting requirements of ASC 815 – “Derivatives and Hedging.” Derivatives not designated as hedges are not speculative and are used to manage our exposure to interest rate movements and other identified risks. Refer to Note 2 for additional discussion of the accounting for designated and non-designated hedges.    

The use of derivative financial instruments involves certain risks, including the risk that the counterparties to these contractual arrangements do not perform as agreed. To mitigate this risk, we only enter into derivative financial instruments with counterparties that have appropriate credit ratings and are major financial institutions with which we and our affiliates may also have other financial relationships.    

Cash Flow Hedges of Interest Rate Risk

Certain of our transactions expose us to interest rate risks, which include a fixed versus floating rate mismatch between our assets and liabilities. We use derivative financial instruments, which include interest rate caps and swaps, and may also include interest rate options, floors, and other interest rate derivative contracts, to hedge interest rate risk.    

The following tables detail our outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (notional amount in thousands):    

June 30, 2020
Interest Rate Derivatives	Number of Instruments		Notional Amount		Strike		Index		Wtd.-Avg. Maturity (Years)
Interest Rate Swaps		2	C$	17,273		1.0%		CDOR		0.2
Interest Rate Caps		1	C$	21,387		3.0%		CDOR		0.5

December 31, 2019
Interest Rate Derivatives	Number of Instruments		Notional Amount		Strike		Index		Wtd.-Avg. Maturity (Years)
Interest Rate Swaps		2	C$	17,273		1.0%		CDOR		0.7
Interest Rate Caps		1	C$	21,387		3.0%		CDOR		1.0

Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on our floating rate debt. During the twelve months following June 30, 2020, we estimate that an additional $13,000 will be reclassified from accumulated other comprehensive income (loss) as an increase to interest expense.    

Net Investment Hedges of Foreign Currency Risk    

Certain of our international investments expose us to fluctuations in foreign interest rates and currency exchange rates. These fluctuations may impact the value of our cash receipts and payments in terms of our functional currency, the U.S. dollar. We use foreign currency forward contracts to protect the value or fix the amount of certain investments or cash flows in terms of the U.S. dollar. During the three months ended March 31, 2020, we terminated all of our outstanding foreign currency forward contracts, with aggregate notional amounts of €552.1 million, £365.5 million, A$134.8 million, and C$23.7 million. During the three months ended June 30, 2020, we entered into foreign currency forward contracts with aggregate notional amounts of €620.4 million, £530.2 million, A$92.8 million, and C$24.4 million.    

Designated Hedges of Foreign Currency Risk

The following table details our outstanding foreign exchange derivatives that were designated as net investment hedges of foreign currency risk (notional amount in thousands):    

June 30, 2020					December 31, 2019
	Number of		Notional			Number of		Notional
Foreign Currency Derivatives	Instruments		Amount		Foreign Currency Derivatives	Instruments		Amount
Buy USD / Sell EUR Forward		7	€	607,690	Buy USD / Sell GBP Forward		4	£	527,100
Buy USD / Sell GBP Forward		5	£	385,087	Buy USD / Sell EUR Forward		5	€	525,600
Buy USD / Sell AUD Forward		1	A$	92,800	Buy USD / Sell AUD Forward		3	A$	135,600
Buy USD / Sell CAD Forward		2	C$	24,400	Buy USD / Sell CAD Forward		1	C$	23,200

Non-designated Hedges of Foreign Currency Risk

The following table details our outstanding foreign exchange derivatives that were non-designated hedges of foreign currency risk (notional amount in thousands):    

June 30, 2020					December 31, 2019
	Number of		Notional			Number of		Notional
Non-designated Hedges	Instruments		Amount		Non-designated Hedges	Instruments		Amount
Buy USD / Sell GBP Forward		1	£	145,113	Buy CAD / Sell USD Forward		1	C$	15,900
Buy USD / Sell EUR Forward		3	€	68,810	Buy USD / Sell CAD Forward		1	C$	15,900
Buy EUR / Sell USD Forward		2	€	56,100	Buy GBP / Sell EUR Forward		1	€	12,857
					Buy AUD / Sell USD Forward		1	A$	10,000
					Buy USD / Sell AUD Forward		1	A$	10,000

Financial Statement Impact of Hedges of Foreign Currency Risk    

The following table presents the effect of our derivative financial instruments on our consolidated statements of operations ($ in thousands):     

			Amount of Income (Expense) Recognized
			from Foreign Exchange Contracts
			Three Months			Six Months
Foreign Exchange Contracts	Location of Income		Ended			Ended
in Hedging Relationships	(Expense) Recognized		June 30, 2020			June 30, 2020
Designated Hedges		Interest Income(1)	$	509		$	509
Non-Designated Hedges		Interest Income(1)		5			5
Non-Designated Hedges		Interest Expense(2)		(361	)		(1,515	)
Total			$	153		$	(1,001	)

(1)	Represents the forward points earned on our foreign currency forward contracts, which reflect the interest rate differentials between the applicable base rate for our foreign currency investments and USD LIBOR. These forward contracts effectively convert the rate exposure to USD LIBOR, resulting in additional interest income earned in U.S. dollar terms.
(2)	Represents the spot rate movement in our non-designated hedges, which are marked-to-market and recognized in interest expense.

Valuation and Other Comprehensive Income

The following table summarizes the fair value of our derivative financial instruments ($ in thousands):    

	Fair Value of Derivatives in an				Fair Value of Derivatives in a
	Asset Position(1) as of				Liability Position(2) as of
	June 30, 2020		December 31, 2019		June 30, 2020		December 31, 2019
Derivatives designated as hedging instruments:
Foreign exchange contracts	$	321	$	—	$	24,706	$	41,728
Interest rate derivatives		—		96		9		—
Total	$	321	$	96	$	24,715	$	41,728
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	6	$	983	$	1,449	$	535
Interest rate derivatives		—		—		—		—
Total	$	6	$	983	$	1,449	$	535
Total Derivatives	$	327	$	1,079	$	26,164	$	42,263

(1) Included in other assets in our consolidated balance sheets.

(2) Included in other liabilities in our consolidated balance sheets.

The following table presents the effect of our derivative financial instruments on our consolidated statements of operations ($ in thousands):

	Amount of Gain (Loss) Recognized in OCI on Derivatives						Location of Gain (Loss)			Amount of Gain (Loss) Reclassified from Accumulated OCI into Income
	Three Months			Six Months			Reclassified from			Three Months			Six Months
Derivatives in Hedging Relationships	Ended June 30, 2020			Ended June 30, 2020			Accumulated OCI into Income			Ended June 30, 2020			Ended June 30, 2020
Net Investment Hedges
Foreign exchange contracts(1)	$	(30,656	)	$	73,430			Interest Expense		$	—		$	—
Cash Flow Hedges
Interest rate derivatives		(18	)		(85	)		Interest Expense	(2)		(9	)		20
Total	$	(30,674	)	$	73,345					$	(9	)	$	20

(1)	During the three and six months ended June 30, 2020, we paid net cash settlements of $4.7 million and received net cash settlements of $57.0 million, respectively, on our foreign currency forward contracts. Those amounts are included as a component of accumulated other comprehensive income (loss) on our consolidated balance sheets.
(2)	During the three months ended June 30, 2020, we recorded total interest and related expenses of $84.9 million, which included interest expenses of $9,000 related to our cash flow hedges. During the six months ended June 30, 2020, we recorded total interest and related expenses of $189.1 million, which included $20,000 related to income generated by our cash flow hedges

Credit-Risk Related Contingent Features

We have entered into agreements with certain of our derivative counterparties that contain provisions where if we were to default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, we may also be declared in default on our derivative obligations. In addition, certain of our agreements with our derivative counterparties require that we post collateral to secure net liability positions. As of June 30, 2020, we were in a net liability position with each such derivative counterparty and posted collateral of $22.2 million under these derivative contracts. As of December 31, 2019, we were in a net liability position with each such derivative counterparty and posted collateral of $30.8 million under these derivative contracts.