Interest Rate Cap

9 Months Ended

Sep. 30, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company is subject to market risk exposure arising from changes in interest rates on the Select term loan, which bears interest at a variable interest rate. The Company’s objective in using an interest rate derivative is to mitigate its exposure to increases in interest rates. The interest rate cap limits the Company’s exposure to increases in the reference rate to 1.0% on $2.0 billion of principal outstanding under the Select term loan. The interest rate cap became effective March 31, 2021 for the monthly periods from and including April 30, 2021 through September 30, 2024. The Company will pay a premium for the interest rate cap over the term of the agreement. The annual premium is equal to 0.0916% of the notional amount.

The interest rate cap has been designated as a cash flow hedge and is highly effective at offsetting the changes in cash outflows when the reference rate exceeds 1.0%. Changes in the fair value of the interest rate cap, net of tax, are recognized in other comprehensive income and are reclassified out of accumulated other comprehensive income (“AOCI”) and into interest expense when the hedged interest obligations affect earnings.

The following table outlines the changes in AOCI, net of tax:


	Nine Months Ended September 30,
	2020		2021
	(in thousands)
Balance as of January 1	$	—	$	(2,027)
Gain on interest rate cap cash flow hedge	—		8,151

Balance as of March 31	$	—	$	6,124
Loss on interest rate cap cash flow hedge	—		(1,403)
Amounts reclassified from AOCI	—		6
Balance as of June 30	$	—	$	4,727
Loss on interest rate cap cash flow hedge	—		(536)
Amounts reclassified from AOCI	—		12
Balance as of September 30	$	—	$	4,203

The estimated pre-tax losses expected to be reclassified from AOCI into interest expense within the next twelve months are approximately $0.3 million.

Refer to Note 10 – Fair Value of Financial Instruments for information on the fair value of the Company’s interest rate cap contract and its balance sheet classification.