Derivatives

The objective of our hedging policy is to adopt a risk averse position with respect to changes in interest rates. Accordingly, we have entered into a number of interest rate derivatives to hedge the current and expected future interest rate payments on our variable rate debt. Interest rate derivatives are agreements in which a series of interest rate cash flows are exchanged with a third party over a prescribed period. The notional amount on an interest rate derivative is not exchanged. Our interest rate derivatives typically provide that we make fixed rate payments and receive floating rate payments to convert our floating rate borrowings to fixed rate obligations to better match the largely fixed rate cash flows from our investments in flight equipment.

We held the following interest rate derivatives as of December 31, 2014:



	Derivative Liabilities
Hedged Item	Current Notional Amount		Effective Date	Maturity Date	Future Maximum Notional Amount		Floating Rate	Fixed Rate	Balance Sheet Location	Fair Value
Interest rate derivatives designated as cash flow hedges:

Securitization No. 2	$	199,671	Jun-12	Jun-17	$	199,671	1M LIBOR	1.26% to 1.28%	Fair value of derivative liabilities	$	1,607
Total interest rate derivatives designated as cash flow hedges	199,671				199,671					1,607

Interest rate derivatives not designated as cash flow hedges:

Securitization No. 2	164,018		Jun-12	Jun-17	164,018		1M LIBOR	1.26%	Fair value of derivative liabilities	1,272
Total interest rate derivatives not designated as cash flow hedges	164,018				164,018					1,272

Total interest rate derivative liabilities	$	363,689			$	363,689				$	2,879

One of the interest rate derivatives hedging Securitization No. 2. was de-designated on November 30, 2014. The effective portion of the loss of $1,719 remained in other comprehensive loss on our consolidated balance sheet and will amortize into interest expense using the effective interest method. The change in fair value as of November 30, 2014 will be recorded in other income (expense) on our consolidated statement of income.

For the year ended December 31, 2014, the amount of effective deferred loss reclassified from OCI into interest expense related to our undesignated active interest rate derivative is $90. The amount of effective deferred loss expected to be reclassified from OCI into interest expense over the next twelve months related to our undesignated active interest rate derivative is $900.

For the year ended December 31, 2014, the amount of effective deferred loss reclassified from OCI into interest expense related to our designated active interest rate derivative was $548.

The weighted average interest pay rates of these derivatives at December 31, 2012, 2013 and 2014 were 2.91%, 3.03% and 1.27%, respectively.

For the year ended December 31, 2014, the amount of loss reclassified from accumulated other comprehensive income (“OCI”) into interest expense related to net interest settlements on active interest rate derivatives was $6,262. The amount of loss expected to be reclassified from OCI into interest expense over the next 12 months related to net interest settlements on active interest rate derivatives is $2,960.

Our interest rate derivatives involve counterparty credit risk. As of December 31, 2014, our interest rate derivatives are held with the following counterparties: JP Morgan Chase Bank NA and Wells Fargo Bank NA. Both of our counterparties or guarantors of these counterparties are considered investment grade (senior unsecured ratings of Aa3 or above) by Moody’s Investors Service. Both are also considered investment grade (long-term foreign issuer ratings of AA- or above) by Standard and Poor’s. We do not anticipate that any of these counterparties will fail to meet their obligations.

In addition to the derivative liability above, another component of the fair value of our interest rate derivatives is accrued interest. As of December 31, 2014, accrued interest payable included in accounts payable, accrued expenses, and other liabilities on our consolidated balance sheet was $149 related to interest rate derivatives designated as cash flow hedges and $121 related to interest rate derivatives not designated as cash flow hedges.

Following is the effect of interest rate derivatives on the statement of financial performance for the year ended December 31, 2014:



Effective Portion								Ineffective Portion
Derivatives in ASC 815 Cash Flow Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivative^(a)			Location of Gain or (Loss) Reclassified from Accumulated OCI into Income	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income^(b)			Location of Gain or (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative^(c)
Interest rate derivatives	$	(3,683	)	Interest expense	$	(41,128	)	Interest expense	$	(740	)

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(a)	This represents the change in fair market value of our interest rate derivatives since year end, net of taxes, offset by the amount of actual cash paid related to the net settlements of the interest rate derivatives for each of the twelve months ended December 31, 2014.


(b)	This represents the amount of actual cash paid, net of taxes, related to the net settlements of the interest rate derivatives for each of the twelve months ended December 31, 2014 plus any effective amortization of net deferred interest rate derivative losses.


(c)	This represents both realized and unrealized ineffectiveness incurred during the twelve months ended December 31, 2014.



Derivatives Not Designated as Hedging Instruments under ASC 815	Location of Gain or (Loss) Recognized in Income On Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
Interest rate derivatives	Other income (expense)	$	1,130

On an ongoing basis, terminated interest rate derivative notionals are evaluated against debt forecasts. To the extent that interest payments are deemed remote to occur, deferred gains or losses are accelerated into interest expense as applicable.

In connection with the repayment of Securitization No. 1., two interest rate derivatives hedging the facility were terminated on February 18, 2014, resulting in a net deferred loss of $26,863 which is being amortized into interest expense using the effective interest method over the original hedge term.

For the year ended December 31, 2014, the amount of deferred net loss (including $78 of accelerated amortization driven by aircraft sales in 2014) reclassified from OCI into interest expense related to our terminated interest rate derivatives was $34,341. The amount of deferred net loss expected to be reclassified from OCI into interest expense over the next 12 months related to our terminated interest rate derivatives is $23,414, of which $5,567 relates to Term Financing No. 1 interest rate derivatives, $10,940 relates to Securitization No. 1 interest rate derivatives, $5,657 relates to ECA Term Financings for New A330 Aircraft, and $1,250 relates to other financings.

The following table summarizes amounts charged directly to the consolidated statement of income for the years ended December 31, 2012, 2013, and 2014 related to our interest rate derivative contracts:



	Year Ended December 31,
	2012		2013		2014
Interest Expense:
Hedge ineffectiveness losses	2,893		$	371	$	738
Amortization:
Accelerated amortization of deferred losses (gains)⁽¹⁾	—		2,931		(78		)
Amortization of loss of designated interest rate derivative	101		1,590		548
Amortization of loss on undesignated interest rate derivative	—		—		90
Amortization of deferred losses	30,676		28,744		34,419
Total Amortization	30,777		33,265		34,979
Total charged to interest expense	$	33,670	$	33,636	$	35,717

Other Income (Expense) - Other:
Mark to market gains on undesignated interest rate derivatives	597		$	4,754	$	1,130
Total charged to other income (expense) - other	$	597	$	4,754	$	1,130

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(1)	For the year ended December 31, 2013, includes accelerated amortization of deferred hedge losses related to two aircraft sold in June 2013. For the year ended December 31, 2014, includes accelerated amortization of deferred hedge gains related to the sale of aircraft.