Derivative Instruments

12 Months Ended

Oct. 30, 2022

Derivative Instruments

Derivative Instruments

Note 20. 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 October 30, 2022 and October 31, 2021 were $1,950.0 million and $2,700.0 million, respectively. Fair value gains or losses on cash flow hedges are 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 amount of gain recorded in OCI at October 30, 2022 that is expected to be reclassified to interest expense in the next twelve months if interest rates remain unchanged is $46.6 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 October 30, 2022 and October 31, 2021 were $9,448.9 million and $7,313.6 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 October 30, 2022 and October 31, 2021, in the consolidated balance sheets related to borrowings designated in fair value hedging relationships were as follows (in millions of dollars). Fair value hedging adjustments are included in the carrying amount of the hedged item.

	Active Hedging Relationships				Discontinued Hedging Relationships
	Carrying		Cumulative		Carrying Amount		Cumulative
	Amount of		Fair Value		of Formerly		Fair Value
2022	Hedged Item		Hedging Adjustment		Hedged Item		Hedging Adjustment
Current maturities of long-term external borrowings					$	2,514.9	$	15.5
Long-term external borrowings	$	8,453.6	$	(950.1)		5,519.6		(19.1)
2021
Current maturities of long-term external borrowings	$	191.2	$	2.7	$	1,997.4	$	(1.7)
Long-term external borrowings		7,139.0		48.3		6,287.3		222.7

Derivatives Not Designated as Hedging Instruments

The Company has certain interest rate contracts (swaps and caps), foreign currency 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 for certain borrowings. The total notional amounts of the interest rate swaps at October 30, 2022 and October 31, 2021 were $3,931.3 million and $2,970.4 million, the foreign currency exchange contracts were $1,069.0 million and $96.7 million, and the cross-currency interest rate contracts were $134.2 million and $237.5 million, respectively. To facilitate borrowings through securitization of retail notes, interest rate caps were sold with notional amounts of $1,020.3 million and $1,645.4 million at October 30, 2022 and October 31, 2021, respectively. Interest rate caps were also purchased with notional amounts of $1,020.3 million and $1,645.4 million at the same dates, respectively. The fair value gains or losses from derivatives not designated as hedging instruments were recorded in the statements of consolidated income, generally offsetting over time the exposure on the hedged item.

Fair values of derivative instruments in the consolidated balance sheets at October 30, 2022 and October 31, 2021 were as follows (in millions of dollars):

	2022		2021
Receivables from John Deere
Designated as hedging instruments:
Interest rate contracts	$	87.5	$	162.8
Not designated as hedging instruments:
Interest rate contracts		124.5		23.4
Cross-currency interest rate contracts		2.8		5.4
Total not designated		127.3		28.8
Other Assets
Not designated as hedging instruments:
Foreign currency exchange contracts		1.3		1.1
Total derivative assets	$	216.1	$	192.7
Other Payables to John Deere
Designated as hedging instruments:
Interest rate contracts	$	947.9	$	79.0
Not designated as hedging instruments:
Interest rate contracts		74.2		17.1
Cross-currency interest rate contracts		2.1		1.5
Total not designated		76.3		18.6
Accounts Payable and Accrued Expenses
Not designated as hedging instruments:
Foreign currency exchange contracts		14.1		4.8
Total derivative liabilities	$	1,038.3	$	102.4

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

	2022		2021		2020
Fair Value Hedges
Interest rate contracts - Interest expense	$	(1,102.0)	$	(208.9)	$	477.3
Cash Flow Hedges
Recognized in OCI
Interest rate contracts - OCI (pretax)		88.3		7.7		(17.4)
Reclassified from OCI
Interest rate contracts - Interest expense		12.4		(9.4)		(17.9)
Not Designated as Hedges
Interest rate contracts - Interest expense *	$	62.4	$	5.2	$	(5.4)
Foreign currency exchange contracts - Administrative and operating expenses *		169.3		(26.6)		57.0
Total not designated	$	231.7	$	(21.4)	$	51.6

*     Includes interest and foreign currency 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 losses of $1,021.7 million and $224.3 million during 2022 and 2021, respectively, and a gain of $468.7 million during 2020.

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 permits the net settlement of amounts owed in the event of default or termination. None of the Company’s derivative agreements contain credit-risk-related contingent features.

The Company’s outstanding derivatives transactions are with both unrelated external counterparties and with John Deere. For derivatives transactions 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.

The Company 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 the Company 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 October 30, 2022 and October 31, 2021.

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 any collateral received or paid at October 30, 2022 and October 31, 2021 were as follows (in millions of dollars):

2022
Derivatives:	Gross Amounts Recognized		Netting Arrangements		Collateral	Net Amount
Assets
External	$	1.3	$	(1.1)		$	.2
John Deere		214.8		(128.3)			86.5
Liabilities
External		14.1		(1.1)			13.0
John Deere		1,024.2		(128.3)			895.9

2021
Derivatives:	Gross Amounts Recognized		Netting Arrangements		Collateral	Net Amount
Assets
External	$	1.1	$	(.3)		$	.8
John Deere		191.6		(97.6)			94.0
Liabilities
External		4.8		(.3)			4.5
John Deere		97.6		(97.6)