DERIVATIVE INSTRUMENTS

The Company uses derivative financial instruments for hedging and non-trading purposes to limit the Company’s exposure to increases in interest rates related to its variable interest rate debt. Use of derivative financial instruments in hedging programs subjects the Company to certain risks, such as market and credit risks. Market risk represents the possibility that the value of the derivative financial instrument will change. In a hedging relationship, the change in the value of the derivative financial instrument is offset to a great extent by the change in the value of the underlying hedged item. Credit risk related to a derivative financial instrument represents the possibility that the counterparty will not fulfill the terms of the contract. The notional, or contractual, amount of the Company’s derivative financial instruments is used to measure interest to be paid or received and does not represent the Company’s exposure due to credit risk. Credit risk is monitored through established approval procedures, including reviewing credit ratings when appropriate.

During 2017, Option Care entered into interest rate caps that reduce the risk of increased interest payments due to interest rates rising. The hedges offset the risk of rising interest rates through 2020 on the first $250.0 million of the Previous First Lien Term Loan. The interest rate caps perfectly offset the terms of the interest rates associated with the variable interest rate Previous First Lien Term Loan. Option Care entered into the interest rate caps as a cash flow hedge for a notional amount of $1.9 million. In April 2019, Option Care terminated its interest rate caps and received cash proceeds of $1.7 million, net of early termination fees. In conjunction with the termination of the interest rate caps, Option Care discontinued the hedge accounting associated with the interest rate caps.

In August 2019, the Company entered into interest rate swap agreements that reduce the variability in the interest rates on the newly-issued debt obligations. The first interest rate swap for $925.0 million notional was effective in August 2019 with $911.1 million designated as a cash flow hedge against the underlying interest rate on the First Lien Term Loan interest payments indexed to one-month LIBOR through August 2021. In accordance with ASU 2017-12, Targeted Improvements to Accounting for Hedges, the Company has determined that the hedges are perfectly effective. The remaining $13.9 million notional amount of the interest rate swap is not designated as a hedging instrument.

The second interest rate swap of $400.0 million notional will become effective in November 2019 and will be designated as a cash flow hedge against the underlying interest rate on the Second Lien Notes interest payments indexed to three-month LIBOR through November 2020. The interest rate designated as a cash flow hedge is expected to be perfectly effective at offsetting the terms of the interest rates associated with the Company’s variable interest rate Second Lien Notes. The following table summarizes the amount and location of the Company’s derivative instruments in the condensed consolidated balance sheets (in thousands):



	Fair value - Derivatives in asset position
Derivative	Balance Sheet Caption	September 30, 2019		December 31, 2018
Interest rate caps designated as cash flow hedges	Prepaids and other current assets	$	—	$	2,627
Total derivatives		$	—	$	2,627



	Fair value - Derivatives in liability position
Derivative	Balance Sheet Caption	September 30, 2019		December 31, 2018
Interest rate swaps designated as cash flow hedges	Other non-current liabilities	$	7,883	$	—
Interest rate swaps not designated as hedges	Other non-current liabilities	120		—
Total derivatives		$	8,003	$	—

The gain and loss associated with the changes in the fair value of the effective portion of the hedging instrument are recorded into other comprehensive (loss) income. The gain and loss associated with the changes in the fair value of the $13.9 million notional amount not designated as a hedging instrument are recognized in net income through interest expense. The following table presents the pre-tax gains (losses) from derivative instruments recognized in other comprehensive (loss) income in the Company’s condensed consolidated statements of comprehensive income (loss) (in thousands):



	Three months ended September 30,					Nine months ended September 30,
Derivative	2019			2018		2019			2018
Interest rate caps designated as cash flow hedges	$	(398	)	$	221	$	(1,103	)	$	2,165
Interest rate swaps designated as cash flow hedges	(7,883		)	—		(7,883		)	—
	$	(8,281	)	$	221	$	(8,986	)	$	2,165

The following table presents the amount and location of pre-tax income (loss) recognized in the Company’s condensed consolidated statement of comprehensive income (loss) related to the Company’s derivative instruments (in thousands):



		Three months ended September 30,					Nine months ended September 30,
Derivative	Income Statement Caption	2019			2018		2019			2018
Interest rate caps designated as cash flow hedges	Interest expense	$	269		$	89	$	(125	)	$	158
Interest rate swaps designated as cash flow hedges	Interest expense	129			—		129			—
Interest rate swaps not designated as hedges	Interest expense	(118		)	—		(118		)	—
		$	280		$	89	$	(114	)	$	158

The Company expects to reclassify $5.8 million of total interest rate costs from accumulated other comprehensive loss against interest expense during the next 12 months.