Derivative Instruments

12 Months Ended

Nov. 01, 2020

Derivative Instruments

Derivative Instruments

Note 21. Derivative Instruments

Cash Flow Hedges

Certain interest rate contracts (swaps) were designated as hedges of future cash flows from borrowings. The total notional amounts of the receive-variable/pay-fixed interest rate contracts at November 1, 2020 and November 3, 2019 were $1,550.0 million and $3,150.0 million, respectively. Fair value gains or losses on these cash flow hedges were recorded in OCI and subsequently reclassified into interest expense in the same periods during which the hedged transactions impact earnings. These amounts offset the effects of interest rate changes on the related borrowings. The cash flows from these contracts were recorded in operating activities in the statement of consolidated cash flows.

The amount of loss recorded in OCI at November 1, 2020 that is expected to be reclassified to interest expense in the next twelve months if interest rates remain unchanged is approximately $6.7 million after-tax. No gains or losses were reclassified from OCI to earnings based on the probability that the original forecasted transaction would not occur.

Fair Value Hedges

Certain interest rate contracts (swaps) were designated as fair value hedges of borrowings. The total notional amounts of the receive-fixed/pay-variable interest rate contracts at November 1, 2020 and November 3, 2019 were $6,525.7 million and $8,336.9 million, respectively. The fair value gains or losses on these contracts were generally offset by fair value gains or losses on the hedged items (fixed-rate borrowings) with both items recorded in interest expense.

The amounts recorded, at November 1, 2020 and November 3, 2019, in the consolidated balance sheet related to borrowings designated in fair value hedging relationships were as follows (in millions of dollars):

			Cumulative Increase (Decrease) of Fair Value
			Hedging Adjustments Included in the
			Carrying Amount
	Carrying		Active
	Amount of		Hedging		Discontinued
2020	Hedged Item		Relationships		Relationships		Total
Current maturities of long-term borrowings	$	2.5			$	2.5	$	2.5
Long-term borrowings		7,149.8	$	530.0		121.6		651.6
2019
Current maturities of long-term borrowings	$	185.4	$	.3	$	(4.4)	$	(4.1)
Long-term borrowings		8,378.1		292.8		(31.6)		261.2

Derivatives Not Designated as Hedging Instruments

The Company has certain interest rate contracts (swaps and caps), foreign exchange contracts (futures, forwards, and swaps), and cross-currency interest rate contracts (swaps), which were not formally designated as hedges. These derivatives were held as economic hedges for underlying interest rate or foreign currency exposures primarily for certain borrowings. The total notional amounts of the interest rate swaps at November 1, 2020 and November 3, 2019 were $2,336.6 million and $2,312.4 million, the foreign exchange contracts were $172.6 million and $691.6 million, and the

cross-currency interest rate contracts were $111.5 million and $91.1 million, respectively. To facilitate borrowings through securitization of retail notes, interest rate caps were sold with notional amounts of $1,961.4 million and $1,611.3 million at November 1, 2020 and November 3, 2019, respectively. Interest rate caps were also purchased with notional amounts of $1,961.4 million and $1,611.3 million at the same dates. The fair value gains or losses from the interest rate contracts were recognized currently in interest expense and the gains or losses from foreign exchange contracts in administrative and operating expenses, generally offsetting over time the expenses on the exposures being hedged. The cash flows from these non-designated contracts were recorded in operating activities in the statement of consolidated cash flows.

Fair values of derivative instruments in the consolidated balance sheet at November 1, 2020 and November 3, 2019 were as follows (in millions of dollars):

	2020		2019
Receivables from John Deere
Designated as hedging instruments:
Interest rate contracts	$	565.2	$	328.8
Not designated as hedging instruments:
Interest rate contracts		10.3		2.6
Cross-currency interest rate contracts		7.7		.5
Total not designated		18.0		3.1
Other Assets
Not designated as hedging instruments:
Foreign exchange contracts		3.8		1.9
Total not designated		3.8		1.9
Total derivative assets	$	587.0	$	333.8
Other Payables to John Deere
Designated as hedging instruments:
Interest rate contracts	$	12.7	$	26.5
Not designated as hedging instruments:
Interest rate contracts		16.7		17.9
Cross-currency interest rate contracts		.7		3.0
Total not designated		17.4		20.9
Accounts Payable and Accrued Expenses
Not designated as hedging instruments:
Foreign exchange contracts		.9		9.9
Total derivative liabilities	$	31.0	$	57.3

The classification and gains (losses) including accrued interest expense related to derivative instruments on the statement of consolidated income consisted of the following (in millions of dollars):

	2020		2019		2018
Fair Value Hedges
Interest rate contracts - Interest expense	$	477.3	$	583.2	$	(281.4)
Cash Flow Hedges
Recognized in OCI
Interest rate contracts - OCI (pretax)		(17.4)		(22.2)		17.8
Reclassified from OCI
Interest rate contracts - Interest expense		(17.9)		5.5		5.5
Not Designated as Hedges
Interest rate contracts - Interest expense *	$	(5.4)	$	(25.8)	$	(6.6)
Foreign exchange contracts - Administrative and operating expenses *		57.0		45.1		96.7
Total not designated	$	51.6	$	19.3	$	90.1

*     Includes interest and foreign exchange gains (losses) from cross-currency interest rate contracts.

Included in the table above are interest expense and administrative and operating expense amounts the Company incurred on derivatives transacted with John Deere. The amounts the Company recognized on these affiliate party transactions were gains of $468.7 million and $561.9 million during 2020 and 2019, respectively, and a loss of $281.1 million during 2018.

Counterparty Risk and Collateral

Derivative instruments are subject to significant concentrations of credit risk to the banking sector. The Company manages individual unrelated external counterparty exposure by setting limits that consider the credit rating of the unrelated external counterparty, the credit default swap spread of the counterparty, and other financial commitments and exposures between the Company and the unrelated external counterparty banks. All interest rate derivatives are transacted under International Swaps and Derivatives Association (ISDA) documentation. Each master agreement executed with an unrelated external counterparty permits the net settlement of amounts owed in the event of default or termination.

The Company’s outstanding derivatives have been transacted with both unrelated external counterparties and with John Deere. For derivatives transacted with John Deere, the Company utilizes a centralized hedging structure in which John Deere enters into a derivative transaction with an unrelated external counterparty and simultaneously enters into a derivative transaction with the Company. Except for collateral provisions, the terms of the transaction between the Company and John Deere are identical to the terms of the transaction between John Deere and its unrelated external counterparty.

Certain of the Company’s derivative agreements executed directly with unrelated external counterparties contain credit support provisions that may require the Company to post collateral based on the size of the net liability positions and  credit ratings. At November 1, 2020 and November 3, 2019, there were no aggregate liability positions for derivatives with credit-risk-related contingent features. In accordance with these agreements, no collateral was posted at November 1, 2020 or November 3, 2019. In addition, the Company paid $2.6 million of collateral either in cash or pledged securities that was outstanding at November 1, 2020, to participate in an international futures market to hedge currency exposure, not included in the table on the subsequent page.

The Company also has ISDA agreements with John Deere that permit the net settlement of amounts owed between counterparties in the event of early termination. In addition, the Company has a loss sharing agreement with John Deere in which it has agreed to absorb any losses and expenses John Deere incurs if an unrelated external counterparty fails to meet its obligations on a derivative transaction that John Deere entered into to manage exposures of the Company. The

loss sharing agreement did not increase the maximum amount of loss that the Company would incur, after considering collateral received and netting arrangements, as of November 1, 2020 and November 3, 2019.

Derivatives are recorded without offsetting for netting arrangements or collateral. The impact on the derivative assets and liabilities for external derivatives and those with John Deere related to netting arrangements and collateral were as follows (in millions of dollars):

2020
Derivatives:	Gross Amounts Recognized		Netting Arrangements		Cash Collateral Received/Paid	Net Amount
Assets
External	$	3.8	$	(.7)		$	3.1
John Deere		583.2		(23.5)			559.7
Liabilities
External		.9		(.7)			.2
John Deere		30.1		(23.5)			6.6

2019
Derivatives:	Gross Amounts Recognized		Netting Arrangements		Cash Collateral Received/Paid	Net Amount
Assets
External	$	1.9	$	(.2)		$	1.7
John Deere		331.9		(42.6)			289.3
Liabilities
External		9.9		(.2)			9.7
John Deere		47.4		(42.6)			4.8