12. Interest Rate Cap Agreements

Risk Management Objective of Using Derivatives

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk, primarily by managing the amount, sources and duration of its debt funding and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish these objectives, the Company primarily uses interest rate cap agreements as part of its interest rate risk management strategy. Payments and receipts related to interest rate cap agreements are included in cash flows from financing activities in the Company’s consolidated statements of cash flows.

In March 2016 and 2017, Legacy CHC and the Joint Venture, respectively, executed annuitized interest rate cap agreements with a combined notional amount of $650,000 and $750,000, respectively, to limit the exposure of the variable component of interest rates under the then existing term loan facility or future variable rate indebtedness, each beginning March 31, 2017 and expired March 31, 2020. Due to the proximity of this maturity to the date of the Merger, these interest rate cap agreements were not redesignated as cash flow hedges by the Company. Instead, the Company recognized an immaterial amount of interest expense related to the change in fair value of these instruments in its consolidated statement of operations for the year ended March 31, 2020.

In August 2018, the Joint Venture executed additional annuitized interest rate cap agreements with notional amounts of $500,000, accreting to $1,500,000 to limit the exposure of the variable component of interest rates under the Term Loan Facility or future variable rate indebtedness to a maximum of 1.0%. The interest rate cap agreements became effective August 31, 2018, accreted to $1,500,000 and expire December 31, 2021. Upon completion of the Merger, these agreements were redesignated as cash flow hedges of the Company.

In March 2020, the Company executed additional annuitized interest rate cap agreements with notional amounts totaling $1,000,000 to limit the exposure of the variable component of the interest rates under the Term Loan Facility or future variable rate indebtedness to a maximum of 1.0%. Each interest rate cap agreement became effective March 31, 2020 and expires March 31, 2024.

At March 31, 2020, each of the Company’s outstanding interest rate cap agreements were designated as cash flow hedges of interest rate risk and was determined to be highly effective.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The Company estimates that $1,203 will be reclassified as an increase to interest expense within one year.

The fair value of the Company’s derivative instruments at March 31, 2020 and 2019 is as follows:


	Fair Values of Derivative Financial Instruments
	Asset (Liability)
Derivative financial instruments designated as hedging instruments:	Balance Sheet Location	March 31, 2020		March 31, 2019
Interest rate cap agreements	Prepaid and other current assets	$	—	$	—
Interest rate cap agreements	Accrued expenses		(28,131)		—
Interest rate cap agreements	Other long-term liabilities		(19,277)		—
		$	(47,408)	$	—

Effect of Derivative Instruments on the Statement of Operations

The effect of the derivative instruments on the accompanying consolidated statements of operations for the years ended March 31, 2020, 2019 and 2018 is as follows:


		Year Ended	Year Ended		Year Ended
Derivative financial instruments in cash flow hedging relationships:		March 31, 2020	March 31, 2019		March 31, 2018
Gain/(loss) related to derivative financial instruments recognized in other comprehensive income (loss)	$	(1,361)	$	—	$	—
Gain/ (loss) related to portion of derivative financial instruments reclassified from accumulated other comprehensive income (loss) to interest expense	$	(22)	$	—	$	—

Credit Risk-Related Contingent Features

The Company has agreements with each of its derivative counterparties providing that if the Company defaults on any of its indebtedness, including a default where repayment of the indebtedness has not been accelerated by the lender, then the Company also could be declared in default on its derivative obligations.

As of March 31, 2020, the termination value of derivative financial instruments in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, was $51,020. If the Company had breached any of these provisions at March 31, 2020, the Company could have been required to settle its obligations under the agreements at this termination value. The Company does not offset any derivative financial instruments and the derivative financial instruments are not subject to collateral posting requirements.