DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

We are exposed to market risk from potential changes in interest rates and foreign currency exchange rates. We regularly evaluate our exposure and enter into derivative financial instruments to economically manage these risks. We record all derivatives as either assets or liabilities on the Consolidated Balance Sheets measured at estimated fair value and we do not offset assets and liabilities with the same counterparty. We recognize the changes in fair value as unrealized gains and losses. The recognition of these gains or losses depends on our intended use of the derivatives and the resulting designation. In certain defined conditions, we may designate a derivative as a hedge for a particular exposure.

Interest Rate Contracts

We and our subsidiaries have a variety of fixed and variable rate debt instruments and are exposed to market risks resulting from interest rate fluctuations. We enter into interest rate swaps and/or caps to reduce our exposure to variability in expected future cash outflows and changes in the fair value of certain Long-term debt, attributable to the changes in LIBOR, EURIBOR and TIBOR. Some of our interest rate contracts contain credit-risk related contingent features and are subject to master netting arrangements. As of January 31, 2015, our interest rate contracts have various maturity dates through February 2018. A portion of our interest rate swaps and caps as of January 31, 2015 are designated as cash flow hedges in accordance with ASC 815.

The hedge accounting for a designated cash flow hedge requires that the effective portion be recorded to Accumulated other comprehensive (loss) income; the ineffective portion of a cash flow hedge is recorded to Interest expense. We evaluate the effectiveness of our cash flow hedging relationships on an ongoing basis. For our derivatives that are designated as cash flow hedges, no material ineffectiveness was recorded for fiscals 2014, 2013 and 2012, respectively. Reclassifications from Accumulated other comprehensive (loss) income to Interest expense primarily relate to realized Interest expense on interest rate swaps and caps and the amortization of gains (losses) recorded on previously terminated or de-designated swaps and caps. We expect to reclassify a net loss of $1 million in fiscal 2015 to Interest expense from Accumulated other comprehensive (loss) income.

The hedge accounting for a designated fair value hedge requires that the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk be recognized in Interest expense. We evaluate the effectiveness of our fair value hedging relationship on an ongoing basis and recalculate the change in the fair value of the derivative and the underlying hedged item separately. During fiscal 2014, the $350 million notional amount interest rate swap that we designated as a fair value hedge failed to meet the effectiveness assessment thresholds required to qualify for hedge accounting. Accordingly, subsequent changes in the fair value of the derivative were recorded in Interest expense. We recorded net gains of less than $1 million in earnings related to ineffectiveness for fiscal 2013 and we recorded a net gain of $5 million in earnings related to ineffectiveness for fiscal 2012. In conjunction with the dedesignation of the fair value hedge, commencing in the second quarter of fiscal 2014, we no longer adjusted the hedged debt for changes in fair value attributable to changes in the benchmark interest rate. We were amortizing to maturity the residual basis adjustment to the hedged debt from the application of hedge accounting to Interest expense. In the third quarter of fiscal 2014, we extinguished the previously hedged debt and recognized a $4 million gain in Interest expense. On November 26, 2014, we terminated the associated $350 million notional amount interest rate swap which was originally scheduled to expire in September 2016. As a result, we received cash proceeds of $10 million, which included $1 million of accrued interest receivable.

Certain of our agreements with credit-risk related contingent features contain cross-default provisions which provide that we could be declared in default on our derivative obligations if we default on certain specified indebtedness. As of January 31, 2015 and February 1, 2014, there were no derivative liabilities related to agreements that contain credit-risk related contingent features. As of January 31, 2015 and February 1, 2014, we were not required to post collateral for any of these derivatives.

The following table presents our outstanding interest rate contracts as of January 31, 2015 and February 1, 2014:



			January 31, 2015	February 1, 2014
(In millions)	Effective Date	Maturity Date	Notional Amount	Notional Amount
Interest Rate Swaps
3 Month USD LIBOR Fixed to Float Interest Rate Swap (1)	September 2010	September 2016	—	350
6 Month JPY TIBOR Float to Fixed Interest Rate Swap (2)	January 2011	January 2016	42	65
Interest Rate Caps
1 Month USD LIBOR Interest Rate Cap (2)	January 2011	April 2015	500	500
1 Month USD LIBOR Interest Rate Cap	January 2011	April 2015	500	500
1 Month USD LIBOR Interest Rate Cap (3)	January 2012	April 2015	500	500
1 Month USD LIBOR Interest Rate Cap	January 2012	April 2015	500	500
3 Month EURIBOR Interest Rate Cap (2)	January 2013	January 2016	34	71
3 Month EURIBOR Interest Rate Cap (2)	February 2013	February 2018	53	64
1 Month USD LIBOR Interest Rate Cap	January 2014	April 2015	311	311


(1)	On November 26, 2014, we terminated this interest rate swap. As a result, we received cash proceeds of $10 million, which included $1 million of accrued interest receivable as described above.


(2)	As of January 31, 2015, these derivatives were designated for hedge accounting.


(3)	The Company de-designated a portion of this interest rate cap in fiscal 2010. As of January 31, 2015 and February 1, 2014, 40% of the $500 million interest rate cap is designated as a cash flow hedge.

Foreign Exchange Contracts

We enter into foreign currency forward contracts to economically hedge the USD merchandise purchases of our foreign subsidiaries and our short-term, cross-currency intercompany loans with and between our foreign subsidiaries. We enter into these contracts in order to reduce our exposure to the variability in expected cash outflows attributable to changes in foreign currency rates. These derivative contracts are not designated as hedges and are recorded on our Consolidated Balance Sheets at fair value with a gain or loss recorded on the Consolidated Statements of Operations in Interest expense.

Our foreign exchange contracts typically mature within 12 months. Some of these contracts contain credit-risk related contingent features and are subject to master netting arrangements. Some of these agreements contain provisions which provide that we could be declared in default on our derivative obligations if we default on certain specified indebtedness. At January 31, 2015 and February 1, 2014, derivative liabilities related to agreements that contain credit-risk related contingent features had a fair value of $2 million and less than $1 million, respectively. We are not required to post collateral for these contracts.

The following table presents our outstanding foreign exchange contracts as of January 31, 2015 and February 1, 2014:

January 31,
2015

February 1,
2014

(In millions)

Effective Date

Maturity Date

Notional

Amount

Notional

Amount

Foreign-Exchange Forwards

Short-term cross-currency intercompany loans

Varies

104

Merchandise purchases

Varies

—

The following table sets forth the net impact of the effective portion of derivatives designated as cash flow hedges on Accumulated other comprehensive (loss) income on our Consolidated Statements of Stockholders’ (Deficit) Equity for the fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013:



	Fiscal Years Ended
(In millions)	January 31, 2015			February 1, 2014			February 2, 2013
Derivatives designated as cash flow hedges:
Beginning balance	$	(1	)	$	(2	)	$	(2	)
Change in fair value recognized in Accumulated other comprehensive (loss) income - Interest Rate Contracts	—			—			—
Reclassifications from Accumulated other comprehensive (loss) income - Interest Rate Contracts	1			1			—
	1			1			—
Ending balance	$	—		$	(1	)	$	(2	)

The following table sets forth the impact of derivatives on Interest expense on our Consolidated Statements of Operations for the fiscal years ended January 31, 2015, February 1, 2014 and February 2, 2013:



	Fiscal Years Ended
(In millions)	January 31, 2015			February 1, 2014			February 2, 2013
Derivatives not designated for hedge accounting:
(Loss) gain on the change in fair value - Interest Rate Contracts	$	(2	)	$	—		$	7
Loss on the change in fair value - Intercompany Loan Foreign Exchange Contracts (1)	(9		)	(1		)	(2		)
Gain (loss) on the change in fair value - Merchandise Purchases Program Foreign Exchange Contracts	9			2			(1		)
	(2		)	1			4
Derivatives designated as cash flow hedges:
Loss reclassified from Accumulated other comprehensive (loss) income (effective portion) - Interest Rate Contracts	—			—			(1		)
Gain amortized from terminated cash flow hedges - Interest Rate Contracts	—			—			1
Amortization of hedged caps	(2		)	(1		)	—
	(2		)	(1		)	—
Derivative designated as a fair value hedge:
Amortization of swap basis adjustment - Interest Rate Contract	—			(1		)	(1		)
Loss on the change in fair value - Interest Rate Contract	(2		)	(5		)	—
Gain recognized in Interest expense on hedged item	2			5			5
	—			(1		)	4
Total Interest expense	$	(4	)	$	(1	)	$	8

(1)

Gains and losses related to our short-term, intercompany loan foreign exchange contracts are recorded in Interest expense, in addition to the corresponding foreign exchange gains and losses related to our short-term, cross-currency intercompany loans. For further details related to gains and losses resulting from foreign currency transactions, refer to Note 1 entitled “SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.”

The following table contains the notional amounts and related fair values of our derivatives included within our Consolidated Balance Sheets as of January 31, 2015 and February 1, 2014:



	January 31, 2015					February 1, 2014
(In millions)	Notional Amount		Fair Value Assets/ (Liabilities)			Notional Amount		Fair Value Assets/ (Liabilities)
Interest Rate Contracts designated as cash flow hedges:
Prepaid expenses and other current assets (1)	$	734	$	—		$	—	$	—
Other assets	53		—			835		—
Accrued expenses and other current liabilities (1)	42		—			—		—
Other non-current liabilities	—		—			65		(1		)
Interest Rate Contract designated as a fair value hedge:
Other assets	—		—			350		13
Interest Rate Contracts not designated for hedge accounting:
Prepaid expenses and other current assets (1)	1,611		—			—		—
Other assets	—		—			1,611		—
Foreign Currency Contracts not designated for hedge accounting:
Prepaid expenses and other current assets	8		—			26		—
Accrued expenses and other current liabilities	$	90	$	(2	)	$	78	$	—
Total derivative contracts outstanding:
Prepaid expenses and other current assets	$	2,353	$	—		$	26	$	—
Other assets	53		—			2,796		13
Total derivative assets (2)	$	2,406	$	—		$	2,822	$	13

Accrued expenses and other current liabilities	$	132	$	(2	)	$	78	$	—
Other non-current liabilities	—		—			65		(1		)
Total derivative liabilities (2)	$	132	$	(2	)	$	143	$	(1	)


(1)	Amounts as of January 31, 2015 includes reclassifications of contracts scheduled to mature within the next 12 months, which were previously included within Other assets or Other non-current liabilities as of February 1, 2014.


(2)	Refer to Note 4 entitled “FAIR VALUE MEASUREMENTS” for the fair value of our derivative instruments classified within the fair value hierarchy.

Offsetting of Derivatives

We present our derivatives at gross fair values in the Consolidated Balance Sheets. However, some of our interest rate and foreign exchange contracts are subject to master netting arrangements which allow net settlements under certain conditions. As of January 31, 2015 and February 1, 2014, the aggregate gross fair value of derivative liabilities which could be net settled against our derivative assets were nominal, respectively, and the aggregate gross fair value of derivative assets which could be net settled against our derivative liabilities were nominal, respectively. As of January 31, 2015 and February 1, 2014, none of the master netting arrangements involved collateral.