Derivatives and Hedging Instruments

6 Months Ended

Jun. 30, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company may periodically enter into derivative financial instruments to manage risks related to interest rates and foreign currency.

The following table summarizes the fair value of derivative instruments as included in the Company’s consolidated statements of financial condition (in thousands):

June 30, 2021

December 31, 2020

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Derivatives designated as hedging instruments:

Interest rate cap contracts

Other assets

727

Other assets

659

Interest rate swap agreements

Other liabilities

(2,501)

Other liabilities

(5,232)

Cross-currency swap agreements

Other liabilities

(968)

Other assets

11,578

Derivatives Designated as Hedging Instruments

The Company has operations in foreign countries which expose the Company to foreign currency exchange rate fluctuations due to transactions denominated in foreign currencies. To mitigate a portion of this risk, the Company may enter into derivative financial instruments, principally foreign currency forward contracts with financial counterparties. The Company adjusts the level and use of derivatives as soon as practicable after learning that an exposure has changed and reviews all exposures and derivative positions on an ongoing basis.

The Company may periodically enter into interest rate swap agreements to reduce its exposure to fluctuations in interest rates on variable interest rate debt and their impact on earnings and cash flows. Under the swap agreements, the Company receives floating interest rate payments and makes interest payments based on fixed interest rates. The Company designates its interest rate swap instruments as cash flow hedges. Previously, the Company held four interest rate swap agreements that hedged the risk of USD-LIBOR interest rate fluctuations for the Encore revolving credit facility and term loan facility. As part of the financing transactions completed in September 2020, the Company settled two of the interest rate swap agreements. As of June 30, 2021, there were two interest rate swap agreements outstanding with a total notional amount of $186.2 million. The Company expects to reclassify approximately $4.2 million of net derivative loss from OCI into earnings relating to interest rate swaps within the next 12 months.

In connection with the financing transactions discussed above, the Company entered into cross-currency swap agreements, which are used to manage foreign currency exchange risk by converting fixed-rate Euro-denominated borrowings including periodic interest payments and the payment of principal at maturity to fixed-rate USD debt and are accounted for as cash flow hedges. As of June 30, 2021, there were four cross-currency swap agreements outstanding with a total notional amount of €350.0 million (approximately $415.0 million based on an exchange rate of $1.00 to €0.84, the exchange rate as of June 30, 2021). The Company expects to reclassify approximately $4.4 million of net derivative loss from OCI into earnings relating to cross-currency swaps within the next 12 months.

Previously, the Company held two interest rate cap contracts (the “2018 Caps”) that hedged the risk of GBP-LIBOR interest rate fluctuations for the Cabot Securitisation Senior Facility interest payments. In February 2020, the Company settled the 2018 Caps and ceased the hedge relationship, which resulted in the reclassification of the associated other comprehensive loss balance to interest expense for approximately $2.5 million during the first quarter of 2020.

As of June 30, 2021, the Company held two interest rate cap contracts with a notional amount of approximately $958.4 million that are used to manage its risk related to interest rate fluctuations on the Company’s variable interest rate bearing debt. The interest rate cap hedging the fluctuations in three-month EURIBOR floating rate debt (“2019 Cap”) has a notional amount of €400.0 million (approximately $474.3 million based on an exchange rate of $1.00 to €0.84, the exchange rate as of June 30, 2021) and matures in 2024. The interest rate cap hedging the fluctuations in sterling overnight index average (“SONIA”) bearing debt (“2020 Cap”) has a notional amount of £350.0 million (approximately $484.1 million based on an exchange rate of $1.00 to £0.72, the exchange rate as of June 30, 2021) and matures in 2023. The Company expects the hedge relationships to be highly effective and designates the 2019 Cap and 2020 Cap as cash flow hedge instruments. The Company expects to reclassify approximately $0.7 million of net derivative loss from OCI into earnings relating to interest rate caps within the next 12 months.

The following tables summarize the effects of derivatives in cash flow hedging relationships designated as hedging instruments in the Company’s consolidated financial statements (in thousands):


Derivatives Designated as Hedging Instruments	Gain (Loss) Recognized in OCI				Location of Gain (Loss) Reclassified from OCI into Income (Loss)	Gain (Loss) Reclassified from OCI into Income (Loss)
	Three Months Ended June 30,					Three Months Ended June 30,
	2021		2020			2021		2020
Foreign currency exchange contracts	$	—	$	48	Salaries and employee benefits	$	—	$	(78)
Foreign currency exchange contracts	—		1		General and administrative expenses	—		(6)
Interest rate swap agreements	(37)		(558)		Interest expense	(2,268)		(2,012)
Interest rate cap contracts	(127)		(735)		Interest expense	(109)		(96)
Cross-currency swap agreements	3,507		—		Interest expense / Other (expense) income	3,665		—


Derivatives Designated as Hedging Instruments	Gain (Loss) Recognized in OCI				Location of Gain (Loss) Reclassified from OCI into Income (Loss)	Gain (Loss) Reclassified from OCI into Income (Loss)
	Six Months Ended June 30,					Six Months Ended June 30,
	2021		2020			2021		2020
Foreign currency exchange contracts	$	—	$	(341)	Salaries and employee benefits	$	—	$	49
Foreign currency exchange contracts	—		(44)		General and administrative expenses	—		11
Interest rate swap agreements	(48)		(7,265)		Interest expense	(4,539)		(3,100)
Interest rate cap contracts	68		(2,131)		Interest expense	(216)		(2,638)
Cross-currency swap agreements	(14,822)		—		Interest expense / Other (expense) income	(13,863)		—

Derivatives Not Designated as Hedging Instruments

The Company enters into currency exchange forward contracts to reduce the effects of currency exchange rate fluctuations between the British Pound and Euro. These derivative contracts generally mature within one to three months and are not designated as hedge instruments for accounting purposes. The Company continues to monitor the level of exposure of the foreign currency exchange risk and may enter into additional short-term forward contracts on an ongoing basis. The gains or losses on these derivative contracts are recognized in other income or expense based on the changes in fair value. As of June 30, 2021, the Company had no outstanding currency exchange forward contracts that were not designated as cash flow hedging instruments.

The following table summarizes the effects of derivatives in cash flow hedging relationships not designated as hedging instruments in the Company’s consolidated statements of operations (in thousands):


		Amount of Gain (Loss) Recognized in Income (Loss)
		Three Months Ended June 30,				Six Months Ended June 30,
Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	2021		2020		2021		2020
Foreign currency exchange contracts	Other income (expense)	$	—	$	2,028	$	—	$	3,971