Derivative Instruments

9 Months Ended

Jul. 30, 2023

Derivative Instruments

Derivative Instruments

(11)  Derivative Instruments

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. Derivative asset and liability positions for transactions with John Deere are recorded in receivables from John Deere and other payables to John Deere, respectively, in the consolidated balance sheets. Derivative asset and liability positions for transactions with unrelated external counterparty banks are recorded in other assets and accounts payable and accrued expenses, respectively, in the consolidated balance sheets.

The fair value of the Company’s derivative instruments and the associated notional amounts were as follows (in millions of dollars):

		July 30, 2023						October 30, 2022						July 31, 2022
				Fair Value						Fair Value						Fair Value
		Notional		Asset		Liability		Notional		Asset		Liability		Notional		Asset		Liability
Cash flow hedges:
Interest rate contracts - swaps	$	1,500.0	$	47.8	$	2.5	$	1,950.0	$	87.5			$	2,350.0	$	58.8	$	.9
Fair value hedges:
Interest rate contracts - swaps		11,479.3		4.0		667.5		9,448.9			$	947.9		7,600.0		23.0		390.1
Not designated as hedging instruments:
Interest rate contracts - swaps		7,392.1		92.6		23.8		3,931.3		75.5		25.2		3,313.2		48.6		20.6
Foreign currency exchange contracts		1,433.0		8.4		5.2		1,069.0		1.3		14.1		930.0		1.8		22.1
Cross-currency interest rate contracts		155.2				24.5		134.2		2.8		2.1		125.7		4.0		1.1
Interest rate caps - sold		1,433.8				25.1		1,020.3				49.0		1,144.8				33.9
Interest rate caps - purchased		1,433.8		25.1				1,020.3		49.0				1,144.8		33.9

The amount of gain recorded in OCI related to cash flow hedges at July 30, 2023 that is expected to be reclassified to interest expense in the next twelve months if interest rates remain unchanged is $34.4 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.

The amounts recorded 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
July 30, 2023	Hedged Item		Hedging Adjustment		Hedged Item		Hedging Adjustment
Current maturities of long-term external borrowings					$	2,323.8	$	25.1
Long-term external borrowings	$	10,760.0	$	(667.4)		6,319.1		(265.0)
October 30, 2022
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)
July 31, 2022
Current maturities of long-term external borrowings	$				$	2,604.6	$	5.0
Long-term external borrowings		7,178.1	$	(385.9)		5,728.0		39.5

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):

	Three Months Ended				Nine Months Ended
	July 30		July 31		July 30		July 31
	2023		2022		2023		2022
Fair Value Hedges
Interest rate contracts - Interest expense	$	(356.2)	$	145.5	$	(124.8)	$	(483.5)
Cash Flow Hedges
Recognized in OCI:
Interest rate contracts - OCI (pretax)	$	23.8	$	.8	$	18.2	$	51.4
Reclassified from OCI:
Interest rate contracts - Interest expense		18.3		3.6		54.5		2.7
Not Designated as Hedges
Interest rate contracts - Interest expense *	$	25.0	$	(3.8)	$	27.4	$	39.3
Foreign currency exchange contracts - Administrative and operating expenses *		(40.4)		18.5		(100.2)		83.0
Total not designated	$	(15.4)	$	14.7	$	(72.8)	$	122.3

*    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 for the three months ended July 30, 2023 and July 31, 2022 were a loss of $326.3 million and a gain of $145.2 million, respectively. The amounts the Company recognized on these affiliate party transactions for the nine months ended July 30, 2023 and July 31, 2022 were losses of $69.9 million and $432.3 million, respectively.  

None of the Company’s derivative agreements contain credit-risk-related contingent features. 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 July 30, 2023, October 30, 2022, and July 31, 2022.

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 were as follows (in millions of dollars):

July 30, 2023
Derivatives:	Gross Amounts Recognized		Netting Arrangements		Collateral	Net Amount
Assets
External	$	8.4	$	(.1)		$	8.3
John Deere		169.5		(108.5)			61.0
Liabilities
External		5.2		(.1)			5.1
John Deere		743.4		(108.5)			634.9

October 30, 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

July 31, 2022
Derivatives:	Gross Amounts Recognized		Netting Arrangements		Collateral	Net Amount
Assets
External	$	1.8	$	(.4)		$	1.4
John Deere		168.3		(105.3)			63.0
Liabilities
External		22.1		(.4)			21.7
John Deere		446.6		(105.3)			341.3