Derivative Financial Instruments

9 Months Ended

Sep. 30, 2011

Derivative Financial Instruments

Derivative Financial Instruments

Note 8. Derivative Financial Instruments

The Company enters into derivative transactions in order to hedge its interest rate risk exposure to the effects of interest rate changes. Additionally, the Company enters into derivative transactions in the course of its portfolio management activities. The counterparties to the Company’s derivative agreements are major financial institutions with which the Company and its affiliates may also have other financial relationships. In the event of nonperformance by the counterparties, the Company is potentially exposed to losses. The counterparties to the Company’s derivative agreements have investment grade ratings and, as a result, the Company does not anticipate that any of the counterparties will fail to fulfill their obligations.

The table below summarizes the aggregate notional amount and estimated net fair value of the derivative instruments as of September 30, 2011 and December 31, 2010 (amounts in thousands):

	As of September 30, 2011						As of December 31, 2010
	Notional			Estimated Fair Value			Notional			Estimated Fair Value
Cash Flow Hedges:
Interest rate swaps	$	508,333		$	(100,849	)	$	483,333		$	(58,365	)
Free-Standing Derivatives:
Commodity swaps	—			3,322			—			(226		)
Credit default swaps—protection sold	33,500			(3,653		)	13,500			492
Total rate of return swaps	—			159			—			104
Foreign exchange forward contracts	(231,582		)	(16,004		)	(154,405		)	(17,296		)
Foreign exchange options	130,207			15,909			130,207			14,791
Common stock warrants	—			3,225			—			3,453
Total	$	440,458		$	(97,891	)	$	472,635		$	(57,047	)

Cash Flow Hedges

The Company uses interest rate derivatives consisting of swaps to hedge a portion of the interest rate risk associated with its borrowings under CLO senior secured notes as well as certain of its floating rate junior subordinated notes. The Company designates these financial instruments as cash flow hedges.

In September 2011, the Company entered into a $25.0 million notional pay-fixed, receive-variable interest rate swap. In June 2010, the Company entered into a $100.0 million notional pay-fixed, receive-variable interest rate swap. These swaps have been designated as cash flow hedges, the objective of which is to eliminate the variability of cash flows in the interest payments of the Company’s floating rate junior subordinated notes debt due to fluctuations in the indexed rate. Changes in value of the interest rate swap are recorded through other comprehensive (loss) income, with gains or losses representing hedge ineffectiveness, if any, recognized in earnings during the reporting period. The hedged transaction period is through July 2037 for the $25.0 million interest rate swap and October 2036 for the $100.0 million interest rate swap; both dates are the stated maturities of the applicable floating rate junior subordinated debt.

The following table shows the net losses recognized in other comprehensive (loss) income related to derivatives in cash flow hedging relationships for the three and nine months ended September 30, 2011 and 2010 (amounts in thousands):

	For the three months ended September 30, 2011			For the three months endedSeptember 30, 2010			For the nine months ended September 30, 2011			For thenine months endedSeptember 30, 2010
Losses recognized in other comprehensive (loss) income on cash flow hedges	$	(40,636	)	$	(17,609	)	$	(42,463	)	$	(44,432	)

Free-Standing Derivatives

Free-standing derivatives are derivatives that the Company has entered into in conjunction with its investment and risk management activities, but for which the Company has not designated the derivative contract as a hedging instrument for accounting purposes. Such derivative contracts may include credit default swaps (“CDS”), foreign exchange contracts and options, interest rate swaps and commodity derivatives. Free-standing derivatives also include investment financing arrangements (total rate of return swaps) whereby the Company receives the sum of all interest, fees and any positive change in fair value amounts from a reference asset with a specified notional amount and pays interest on such notional amount plus any negative change in fair value amounts from such reference asset.

Gains and losses on free-standing derivatives are reported on the condensed consolidated statements of operations in net realized and unrealized (loss) gain on derivatives and foreign exchange. Unrealized gains (losses) represent the change in fair value of the derivative instruments and are noncash items.

For all hedges where hedge accounting is being applied, effectiveness testing and other procedures to ensure the ongoing validity of the hedges are performed at least quarterly. During the three and nine months ended September 30, 2011 and 2010, the Company recognized an immaterial amount of ineffectiveness in income on the condensed consolidated statements of operations from its cash flow hedges.

Credit Default Swaps

A CDS is a contract in which the contract buyer pays, in the case of a short position, or receives, in the case of long position, a periodic premium until the contract expires or a credit event occurs. In return for this premium, the contract seller receives a payment from or makes a payment to the buyer if there is a credit default or other specified credit event with respect to the issuer (also known as the referenced entity) of the underlying credit instrument referenced in the CDS. Typical credit events include bankruptcy, dissolution or insolvency of the referenced entity, failure to pay and restructuring of the obligations of the referenced entity.

As of September 30, 2011 and December 31, 2010, the Company had sold protection with a notional amount of $33.5 million and $13.5 million, respectively. The Company sells protection to replicate fixed income securities and to complement the spot market when cash securities of the referenced entity of a particular maturity are not available or when the derivative alternative is less expensive compared to other purchasing alternatives.

Commodity Derivatives

In an effort to minimize the effects of the volatility of oil, natural gas and natural gas liquids prices, the Company will from time to time, enter into derivative instruments such as swap contracts to hedge its forecasted commodities sales. The Company does not designate these contracts as cash flow hedges and as such, the changes in fair value of these instruments are recorded in current period earnings.

The Company entered into commodity derivative contracts, consisting of oil, natural gas and certain natural gas liquid products receive-fixed, pay-floating swaps for certain years through 2015. For the three and nine months ended September 30, 2011, the Company had an immaterial amount of commodity derivatives settlements, which are settled monthly.