Derivative Instruments And Hedging Activities

6 Months Ended

Aug. 31, 2012

Derivative Instruments And Hedging Activities [Abstract]

Derivative Instruments And Hedging Activities

5.Derivative Instruments and Hedging Activities

Risk Management Objective of Using Derivatives.  We are exposed to certain risks arising from both our business operations and economic conditions, particularly with regard to future issuances of fixed-rate debt and existing and future issuances of floating-rate debt.  Primary exposures include LIBOR and other rates used as benchmarks in our securitizations.  We enter into derivative instruments to manage exposures that arise from business activities that result in the future known receipt or payment of uncertain cash amounts, the values of which are impacted by interest rates.  Our derivative instruments are used to manage differences in the amount of our known or expected cash receipts and our known or expected cash payments principally related to the funding of our auto loan receivables.

We do not anticipate significant market risk from derivatives as they are predominantly used to match funding costs to the use of the funding.  However, disruptions in the credit or interest rate markets could impact the effectiveness of our hedging strategies. 

Credit risk is the exposure to nonperformance of another party to an agreement.  We mitigate credit risk by dealing with highly rated bank counterparties.

Cash Flow Hedges of Interest Rate Risk.Our objectives in using interest rate derivatives are to add stability to interest expense, to manage our exposure to interest rate movements and to better match funding costs to the interest received on the fixed-rate receivables being securitized.  To accomplish these objectives, we primarily use interest rate swaps.  Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for our making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.  These interest rate swaps are designated as cash flow hedges of forecasted interest payments in anticipation of permanent funding in the term securitization market. 

For derivatives that are designated and qualify as cash flow hedges, the effective portion of changes in the fair value is initially recorded in accumulated other comprehensive loss (“AOCL”) and is subsequently reclassified into CAF income in the period that the hedged forecasted transaction affects earnings.  The ineffective portion of the change in fair value of the derivatives is recognized directly in CAF income.  Amounts reported in AOCL related to derivatives will be reclassified to CAF income as interest expense is incurred on our future issuances of fixed-rate debt.  During the next 12 months, we estimate that an additional $12.7 million will be reclassified as a decrease to CAF income.

As of August 31, 2012, we had interest rate swaps outstanding with a combined notional amount of $993.0million that were designated as cash flow hedges of interest rate risk.

Non-designated Hedges.Derivative instruments not designated as accounting hedges, including interest rate swaps and interest rate caps, are not speculative. These instruments are used to limit risk for investors in the warehouse facilities, to minimize the funding costs related to certain term securitization vehicles and to mitigate interest rate risk associated with related financial instruments.  Changes in the fair value of derivatives not designated as accounting hedges are recorded directly in CAF income.

As of August 31, 2012, we had interest rate swaps outstanding with a combined notional amount of $11.1 million and interest rate caps outstanding with offsetting (asset and liability) notional amounts of $790.4 million, which are not designated as accounting hedges.

Fair Values of Derivative Instruments on the Consolidated Balance Sheets.  The table below presents the fair value of our derivative instruments as well as their classification on the consolidated balance sheets.  See Note 6 for additional information on fair value measurements.

Fair Values of Derivative Instruments

	As of August 31, 2012					As of February 29, 2012
(In thousands)	Assets			Liabilities		Assets		Liabilities
Derivatives designated as accounting hedges:
Interest rate swaps (1)		$	―	$	―	$	11	$	―
Interest rate swaps (2)			―		(4,600)		―		(1,643)
Total derivatives designated as accounting hedges			―		(4,600)		11		(1,643)
Derivatives not designated as accounting hedges:
Interest rate swaps (1)			8		―		304		―
Interest rate swaps (2)			―		(8)		―		(335)
Interest rate caps (1)			54		(54)		83		(81)
Total derivatives not designated as accounting hedges			62		(62)		387		(416)
Total		$	62	$	(4,662)	$	398	$	(2,059)

⁽¹⁾Reported in other current assets on the consolidated balance sheets.

⁽²⁾Reported in accounts payable on the consolidated balance sheets.

Effect of Derivative Instruments on the Consolidated Statements of Earnings.  The table below presents the effect of the company’s derivative instruments on the consolidated statements of earnings.

Effect on the Consolidated Statements of Earnings

		Three Months Ended				Six Months Ended
		August 31				August 31
(In thousands)		2012		2011		2012		2011
Derivatives designated as accounting hedges:
Loss recognized in AOCL (1)	$	(3,380)	$	(10,705)	$	(6,392)	$	(17,118)
Loss reclassified from AOCL into CAF income (1)	$	(3,293)	$	(975)	$	(6,528)	$	(2,095)
Derivatives not designated as accounting hedges:
Loss recognized in CAF income (2)	$	―	$	(35)	$	(1)	$	(75)

⁽¹⁾Represents the effective portion.

⁽²⁾Represents the loss on interest rate swaps, the net periodic settlements and accrued interest.