Derivative Financial Instruments

9 Months Ended

Sep. 30, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

10. 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 includes interest rate caps, and may also include interest rate swaps, 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):

September 30, 2021
Interest Rate Derivatives	Number of Instruments	Notional Amount		Strike			Index		Wtd.-Avg. Maturity (Years)
Interest Rate Caps	1	C$	21,020		1.0	%		CDOR		0.2

December 31, 2020
Interest Rate Derivatives	Number of Instruments	Notional Amount		Strike			Index		Wtd.-Avg. Maturity (Years)
Interest Rate Caps	2	C$	38,293		1.0	%		CDOR		0.8

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 September 30, 2021, we estimate that an additional $3,000 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.

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):

September 30, 2021				December 31, 2020
Foreign Currency Derivatives	Number of Instruments	Notional Amount		Foreign Currency Derivatives	Number of Instruments		Notional Amount
Buy USD / Sell SEK Forward	1	kr	999,500	Buy USD / Sell EUR Forward		8	€	754,722
Buy USD / Sell EUR Forward	6	€	817,642	Buy USD / Sell GBP Forward		4	€	372,487
Buy USD / Sell GBP Forward	1	£	542,551	Buy USD / Sell AUD Forward		1	A$	92,800
Buy USD / Sell AUD Forward	1	A$	89,500	Buy USD / Sell CAD Forward		1	C$	26,200
Buy USD / Sell CAD Forward	1	C$	21,000

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):

September 30, 2021				December 31, 2020
Non-designated Hedges	Number of Instruments	Notional Amount		Non-designated Hedges	Number of Instruments		Notional Amount
Buy GBP / Sell EUR Forward	1	€	8,410	Buy EUR / Sell GBP Forward		2	£	146,207
Buy EUR / Sell USD Forward	1	€	13,900	Buy USD / Sell EUR Forward		1	€	8,410
Buy USD / Sell EUR Forward	1	€	13,900

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):

				Increase (Decrease) to Net Interest Income Recognized from Foreign Exchange Contracts
				Three Months			Three Months			Nine Months			Nine Months
Foreign Exchange Contracts	Location of Income			Ended			Ended			Ended			Ended
in Hedging Relationships	(Expense) Recognized			September 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
Designated Hedges		Interest Income	(1)	$	1,542		$	1,794		$	5,294		$	2,303
Non-Designated Hedges		Interest Income	(1)		34			(227	)		(340	)		(222	)
Non-Designated Hedges		Interest Expense	(2)		(8	)		669			(7,139	)		(846	)
Total				$	1,568		$	2,236		$	(2,185	)	$	1,235

(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 Asset Position(1) as of				Fair Value of Derivatives in a Liability Position(2) as of
	September 30, 2021		December 31, 2020		September 30, 2021		December 31, 2020
Derivatives designated as hedging instruments:
Foreign exchange contracts	$	35,460	$	521	$	—	$	55,758
Interest rate derivatives		—		1		—		—
Total	$	35,460	$	522	$	—	$	55,758
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	398	$	—	$	355	$	3,157
Interest rate derivatives		—		—		—		—
Total	$	398	$	—	$	355	$	3,157
Total Derivatives	$	35,858	$	522	$	355	$	58,915

(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 Recognized in OCI on Derivatives				Location of Gain (Loss)			Amount of Loss Reclassified from Accumulated OCI into Income
	Three Months		Nine Months		Reclassified from Accumulated			Three Months			Nine Months
Derivatives in	Ended		Ended					Ended			Ended
Hedging Relationships	September 30, 2021		September 30, 2021		OCI into Income			September 30, 2021			September 30, 2021
Net Investment Hedges
Foreign exchange contracts(1)	$	46,078	$	65,052		Interest Expense		$	—		$	—
Cash Flow Hedges
Interest rate derivatives		—		—		Interest Expense	(2)		(5	)		(7	)
Total	$	46,078	$	65,052				$	(5	)	$	(7	)

(1)	During the three and nine months ended September 30, 2021, we received net cash settlements of $18.3 million and paid net cash settlements of $31.0 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 September 30, 2021, we recorded total interest and related expenses of $82.7 million, which included interest expense of $5,000 related to our cash flow hedges. During the nine months ended September 30, 2021, we recorded total interest and related expenses of $243.4 million, which included interest expense of $7,000.

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 September 30, 2021, we were in a net asset position with both of our derivative counterparties and did not have any collateral posted under these derivative contracts. As of December 31, 2020, we were in a net liability position with each such derivative counterparty and posted collateral of $51.1 million under these derivative contracts.