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Derivative Instruments and Hedging Activities | NOTE 10—Derivative instruments and hedging activities:
In 2019, approximately 48% of Teva’s revenues were denominated in currencies other than the U.S. dollar. As a result, Teva is subject to significant foreign currency risks. The Company enters into forward exchange contracts, purchases and writes options in order to hedge the currency exposure on balance sheet items and operating activities. In addition, the Company takes measures to reduce exposure by using natural hedging. The Company also acts to offset risks in opposite directions among the companies in the Group. The currency hedged items are usually denominated in the following main currencies: the British pound (GBP), the euro (EUR), the Swiss franc (CHF), the Japanese yen (JPY), the Polish zloty (PLN), the new Israeli shekel (NIS), the Russian ruble (RUB), Canadian dollar (CAD), the Mexican peso (MXN), the Indian rupee (INR) and other European and Latin American currencies. Depending on market conditions, foreign currency risk is also managed through the use of foreign currency debt. The Company hedges against possible fluctuations in foreign subsidiaries net assets (“net investment hedge”) and entered into cross currency swaps and forward contracts in order to hedge such an exposure. Most of the counterparties to the derivatives are major banks and the Company is monitoring the associated inherent credit risks. The Company does not enter into derivative transactions for trading purposes.
The Company raises capital through various debt instruments, including straight notes that bear a fixed or variable interest rate, bank loans, securitizations and convertible debentures. In some cases, the Company has swapped from a fixed to a floating interest rate (“fair value hedge”) and from a fixed to a fixed interest rate with an exchange from a currency other than the functional currency (“cash flow hedge”), thereby reducing overall interest expenses or hedging risks associated with interest rate fluctuations.
The following table summarizes the notional amounts for hedged items, when transactions are designated as hedge accounting:
The following table summarizes the classification and fair value of derivative instruments:
The table below provides information regarding the location and amount of
pre-tax (gains) losses from derivatives designated in fair value or cash flow hedging relationships:
The table below provides information regarding the location and amount of
pre-tax (gains) losses from derivatives not designated as hedging instruments:
Commencing in the third quarter of 2015, Teva entered into forward starting interest rate swap and treasury lock agreements designated as cash flow hedges of the U.S. dollar debt issuance in July 2016, with respect to $3.75 billion and $1.5 billion notional amounts, respectively. These agreements hedged the variability in anticipated future interest payments due to possible changes in the benchmark interest rate between the date the agreements were entered into and the actual date of the U.S. dollar debt issuance in July 2016 (in connection with the closing of the Actavis Generics acquisition). Certain of the forward starting interest rate swaps and treasury lock agreements matured during the first half of 2016. In July 2016, in connection with the debt issuances, Teva terminated the remaining forward starting interest rate swaps and treasury lock agreements. The termination of these transactions resulted in a loss position of $ 493 million, of which $ 242 million were settled on October 7, 2016 and the remaining amount was settled in January 2017. The change in fair value of these instruments recorded in other comprehensive income (loss) will be amortized under financial expenses-net over the life of the debt. Such losses mainly reflect the changes in the benchmark interest rate between the date the agreements were entered into and the actual date of the U.S. debt issuance in July 2016.With respect to the forward starting interest rate swaps and treasury lock agreements, losses of $29 million, $28 million and $27 million were recognized under financial expenses, net for the years ended December 31, 2019, In the third quarter of 2019, Teva terminated $500 million interest rate swap agreements designated as fair value hedge relating to its 2.8% senior notes due 2023 with respect to $3,000 million notional amount. Settlement of these transactions resulted in cash proceeds of $ 10 million. The fair value hedge accounting adjustments of these instruments, which are recorded under senior notes and loans, are amortized under financial expenses- net over the life of the debt. In the fourth quarter of 2019, Teva terminated $588 million cross-currency swap agreements against its outstanding 3.65% senior notes maturing in November 2021. Settlement of these transactions resulted in cash proceeds of $95 million. The cash flow hedge accounting adjustments of these instruments, which are recorded under senior notes and loans, are amortized under financial expenses-net over the life of the debt. With respect to the interest rate swap agreements, gains of $6 million, $6 million and $7 million were recognized under financial expenses, net for the years ended December 31, 2019, 2018 and 2017, respectively.
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