Derivative Financial Instruments

12 Months Ended

Dec. 31, 2012

Derivative Financial Instruments

Derivative Financial Instruments

15.  Derivative Financial Instruments

SLFC uses derivative financial instruments in managing the cost of its debt by mitigating its exposures to interest rate and currency risks in conjunction with specific long-term debt issuances and has used them in managing its return on finance receivables held for sale, but is neither a dealer nor a trader in derivative financial instruments. During the third quarter of 2012, we terminated a cross currency interest rate swap agreement with a remaining notional amount of €183.0 million. At December 31, 2012, SLFC’s remaining derivative financial instrument (included in other assets) consisted of a cross currency interest rate swap agreement that matures in 2013.

While SLFC’s cross currency interest rate swap agreement mitigates economic exposure of related debt, it does not currently qualify as a cash flow or fair value hedge under U.S. GAAP.

Weighted average receive and pay rates of our cross currency interest rate swap agreements were as follows:

(dollars in thousands)	Successor Company
December 31,		2012	2011
Weighted average receive rate		4.13   %	3.69   %
Weighted average pay rate		0.56   %	2.73   %

Changes in the notional amounts of our cross currency interest rate swap agreements and foreign currency forward agreement were as follows:

	Successor							Predecessor
	Company							Company
						At or for the		At or for the
		At or for the		At or for the		One Month		Eleven Months
		Year Ended		Year Ended		Ended		Ended
		December 31,		December 31,		December 31,		November 30,
(dollars in thousands)		2012		2011		2010		2010
Balance at beginning of period		$	1,269,500	$	2,727,386	$	2,727,386	$	3,499,686
Expired contracts		-		(1,457,886)		-		(772,300)
Discontinued and terminated contracts		(852,864)		-		-		-
Balance at end of period		$	416,636	$	1,269,500	$	2,727,386	$	2,727,386

During 2012, we decreased the notional amounts of our Euro cross currency interest rate swap agreements by €676.7 million. We elected to discontinue hedge accounting prospectively on one of our cash flow hedges as of May 2012 and terminated this cross currency interest rate swap agreement in August 2012. We continue to report the gain related to the discontinued and terminated cash flow hedge in accumulated other comprehensive income, which is being reclassified into earnings during the remaining contractual term of the debt agreement (January 2013) as the hedged transaction impacts earnings. As a result of our decision to repurchase Euro denominated debt, we elected to discontinue hedge accounting and subsequently accelerated the reclassification of amounts in accumulated other comprehensive income to other revenues resulting in gains of $0.7 million in 2012.

Fair value of derivative instruments presented on a gross basis by type were as follows:

	Successor
	Company
		December 31, 2012						December 31, 2011
(dollars in thousands)		Notional Amount		Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities
Hedging Instruments
Cross currency interest rate		$	-	$	-	$	-	$	625,250	$	25,148	$	-
Non-Designated Hedging Instruments
Cross currency interest rate		416,636		26,699		-		644,250		54,279		-
Total derivative instruments		$	416,636	$	26,699	$	-	$	1,269,500	$	79,427	$	-

The amount of gain (loss) for cash flow hedges recognized in accumulated other comprehensive income or loss, reclassified from accumulated other comprehensive income or loss into other revenues (effective and ineffective portion) and interest expense (effective portion), and recognized in other revenues (ineffective portion) were as follows:

				From AOCI(L) (a) to									Recognized
				Other			Interest						in Other
(dollars in thousands)	AOCI(L)			Revenues (b)			Expense			Earnings (c)			Revenues
Successor Company
Year Ended
December 31, 2012
Cross currency interest rate	$	(16,987	)	$	(12,343	)	$	1,839		$	(10,504	)	$	(426	)
Successor Company
Year Ended
December 31, 2011
Interest rate	$	(3,084	)	$	-		$	(1,624	)	$	(1,624	)	$	(2,569	)
Cross currency interest rate	34,877			26,391			1,963			28,354			840
Total	$	31,793		$	26,391		$	339		$	26,730		$	(1,729	)
Successor Company
One Month Ended
December 31, 2010
Interest rate	$	8,998		$	11,137		$	(3,599	)	$	7,538		$	2,432
Cross currency interest rate	56,698			56,492			87			56,579			1,127
Total	$	65,696		$	67,629		$	(3,512	)	$	64,117		$	3,559
Predecessor Company
Eleven Months Ended
November 30, 2010
Interest rate	$	23,518		$	33,955		$	(38,987	)	$	(5,032	)	$	(2,822	)
Cross currency interest rate	(57,639		)	(22,301		)	(14,824		)	(37,125		)	(26,404		)
Total	$	(34,121	)	$	11,654		$	(53,811	)	$	(42,157	)	$	(29,226	)

(a) Accumulated other comprehensive income (loss).

(b) See table below for the effective and ineffective components of other revenues reclassified from accumulated other comprehensive income or loss.

(c) Represents the total amounts reclassified from accumulated other comprehensive income or loss to other revenues and to interest expense for cash flow hedges as disclosed on our consolidated statement of comprehensive income (loss).

Other revenues reclassified from accumulated other comprehensive income or loss consisted of the following:

	Successor
(dollars in thousands)	Company
Years Ended December 31,	2012			2011
Effective portion	$	(13,050	)	$	26,391
Ineffective portion*	707			-
Total	$	(12,343	)	$	26,391

* Ineffective portion for 2012 consisted of gains related to our election to discontinue hedge accounting.

At December 31, 2012, we expect the remaining $0.2 million deferred net gain on cash flow hedges to be reclassified from accumulated other comprehensive income or loss to earnings during the next twelve months.

The amounts recognized in other revenues for non-designated hedging instruments were as follows:

(dollars in thousands)	Non-Designated Hedging Instruments
Successor Company
Year Ended December 31, 2012
Cross currency interest rate	$	(33,761	)
Successor Company
Year Ended December 31, 2011
Cross currency interest rate and interest rate	$	25,262
Equity-indexed	215
Total	$	25,477
Successor Company
One Month Ended December 31, 2010
Cross currency interest rate and interest rate	$	23,005
Equity-indexed	27
Total	$	23,032
Predecessor Company
Eleven Months Ended November 30, 2010
Cross currency interest rate and interest rate	$	39,386
Equity-indexed	292
Total	$	39,678

Derivative adjustments included in other revenues consisted of the following:

	Successor									Predecessor
	Company									Company
							One Month			Eleven Months
	Year Ended			Year Ended			Ended			Ended
	December 31,			December 31,			December 31,			November 30,
(dollars in thousands)	2012			2011			2010			2010
Mark to market gains (losses)	$	(28,659	)	$	(26,572	)	$	27,777		$	(62,394	)
Net interest income	18,745			23,788			1,984			14,724
Credit valuation adjustment gains (losses)	(3,559		)	5,842			(1,571		)	11,980
Ineffectiveness gains (losses)	(426		)	(1,729		)	3,559			(29,226		)
Other comprehensive income release gain on cash flow hedge maturities	-			-			-			68,803
Other	2,136			215			1,114			292
Total	$	(11,763	)	$	1,544		$	32,863		$	4,179

SLFC is exposed to credit risk if counterparties to swap agreements do not perform. SLFC regularly monitors counterparty credit ratings throughout the term of the agreements. SLFC’s exposure to market risk is limited to changes in the value of swap agreements offset by changes in the value of the hedged debt.