Financial Instruments

3 Months Ended

Mar. 31, 2020

Financial Instruments [Abstract]

Financial Instruments

Financial Instruments

The Company's indebtedness creates interest rate risk on its variable-rate debt. The Company uses derivative financial instruments to manage its exposure to interest rate risk. The Company does not hold or issue derivative financial instruments for trading or speculative purposes.

The Company has interest rate cap agreements that entitle it to payments from the counterparty of the amount, if any, by which three-month London Interbank Offered Rate ("LIBOR") exceeds the strike rates of the caps during the agreement period in exchange for an upfront premium. During 2020, the Company did not enter into interest rate cap agreements.

As of March 31, 2020 and December 31, 2019, the Company had interest rate cap agreements with a fair value of less than $1 million which were classified within Other assets on the Consolidated Balance Sheets. The total notional value of the interest rate cap agreements was $2.8 billion as of March 31, 2020 and December 31, 2019 of which $1.4 billion mature at December 31, 2020 and December 31, 2022, respectively.

The fair values of the Company's interest rate cap agreements are classified as Level 2 in the fair value hierarchy. The valuation of the interest rate cap agreements is derived by using a discounted cash flow analysis on the expected cash receipts that would occur if variable interest rates rise above the strike rates of the caps. This analysis reflects the contractual terms of the interest rate cap agreements, including the period to maturity, and uses observable market-based inputs, including LIBOR curves and implied volatilities. The Company also incorporates insignificant credit valuation adjustments to appropriately reflect the respective counterparty's nonperformance risk in the fair value measurements.

The counterparty credit spreads are based on publicly available credit information obtained from a third-party credit data provider. For additional information, see Note 6 (Long-Term Debt).

The interest rate cap agreements are designated as cash flow hedges. The changes in the fair value of derivatives that qualify as cash flow hedges are recorded in Accumulated other comprehensive loss and are subsequently reclassified into Interest expense in the period when the hedged forecasted transaction affects earnings. The Company recorded an insignificant loss and a $8 million loss, net of tax, into Accumulated other comprehensive loss for the three months ended March 31, 2020 and 2019, respectively. During the three months ended March 31, 2020 and 2019, the Company reclassified $1 million and $2 million, net of tax, respectively, from Accumulated other comprehensive loss to earnings within Interest expense, net on the Consolidated Statements of Operations. The Company expects to reclassify $7 million from Accumulated other comprehensive loss to earnings within Interest expense, net during the next 12 months.