NOTE 8—DERIVATIVE FINANCIAL INSTRUMENTS

Use of Derivatives

We are an end user of derivative financial instruments and do not engage in derivative trading. We use derivatives, primarily interest rate swaps and treasury rate locks, to manage interest rate risk. Derivatives may be privately negotiated contracts, which are often referred to as over-the-counter (“OTC”) derivatives, or they may be listed and traded on an exchange. We generally engage in OTC derivative transactions.

Accounting for Derivatives

In accordance with the accounting standards for derivatives and hedging activities, we record derivative instruments at fair value as either a derivative asset or derivative liability on our condensed consolidated balance sheets. We report derivative asset and liability amounts on a gross basis based on individual contracts, which does not take into consideration the effects of master netting agreements or collateral netting. Derivatives in a gain position are reported as derivative assets on our condensed consolidated balance sheets, while derivatives in a loss position are reported as derivative liabilities. Accrued interest related to derivatives is reported on our condensed consolidated balance sheets as a component of either accrued interest and other receivables or accrued interest payable.

If we do not elect hedge accounting treatment, changes in the fair value of derivative instruments, which consist of net accrued periodic derivative cash settlements and derivative forward value amounts, are recognized in our consolidated statements of operations under derivative gains (losses). If we elect hedge accounting treatment for derivatives, we formally document, designate and assess the effectiveness of the hedge relationship. Changes in the fair value of derivatives designated as qualifying fair value hedges are recorded in earnings together with offsetting changes in the fair value of the hedged item and any related ineffectiveness. Changes in the fair value of derivatives designated as qualifying cash flow hedges are recorded as a component of other comprehensive income (“OCI”), to the extent that the hedge relationships are effective, and reclassified AOCI to earnings using the effective interest method over the term of the forecasted transaction. Any ineffectiveness in the hedging relationship is recognized as a component of derivative gains (losses) in our consolidated statement of operations.

We generally do not designate interest rate swaps, which represent the substantial majority of our derivatives, for hedge accounting. Accordingly, changes in the fair value of interest rate swaps are reported in our consolidated statements of operations under derivative gains (losses). Net periodic cash settlements related to interest rate swaps are classified as an operating activity in our consolidated statements of cash flows.

We typically designate treasury rate locks as cash flow hedges of forecasted debt issuances. Accordingly, changes in the fair value of the derivative instruments are recorded as a component of OCI and reclassified to interest expense when the forecasted transaction occurs using the effective interest method. Any ineffectiveness in the hedging relationship is recognized as a component of derivative gains (losses) in our consolidated statements of operations. We did not have any derivatives designated as accounting hedges as of February 29, 2016 and May 31, 2015.

Outstanding Notional Amount of Derivatives

The notional amount provides an indication of the volume of our derivatives activity, but this amount is not recorded on our condensed consolidated balance sheets. The notional amount is used only as the basis on which interest payments are determined and is not the amount exchanged. The following table shows the outstanding notional amounts and the weighted-average rate paid and received for our interest rate swaps, by type, as of February 29, 2016 and May 31, 2015. The substantial majority of our interest rate exchange agreements use an index based on the London Interbank Offered Rate (“LIBOR”) for either the pay or receive leg of the swap agreement.



	February 29, 2016						May 31, 2015
(Dollars in thousands)	Notional Amount		Weighted- Average Rate Paid		Weighted- Average Rate Received		Notional Amount		Weighted- Average Rate Paid		Weighted- Average Rate Received
Pay-fixed swaps	$	6,731,641	2.95	%	0.61	%	$	5,776,533	3.15	%	0.28	%
Receive-fixed swaps	3,499,000		1.01		2.82		3,849,000		0.79		3.09
Total interest rate swaps	$	10,230,641	2.29		1.36		$	9,625,533	2.21		1.40

In addition to the notional amount of swaps shown in the chart above, we have $40 million notional amount of forward

starting swaps with an effective date of June 30, 2016. As of February 29, 2016, the $40 million notional amount of

forward starting swaps had a related fair value recorded on our condensed consolidated balance sheet. Because these swaps

were not effective as of February 29, 2016, there have been no accrued cash settlement amounts as of this date.

Impact of Derivatives on Condensed Consolidated Balance Sheets

The following table displays the fair value of the derivative assets and derivative liabilities recorded on our condensed consolidated balance sheets and the related outstanding notional amount of our interest rate swaps as of February 29, 2016 and May 31, 2015.



	February 29, 2016					May 31, 2015
(Dollars in thousands)	Fair Value			Notional Balance		Fair Value			Notional Balance
Derivative assets	$	104,535		$	3,499,000	$	115,276		$	3,448,615
Derivative liabilities	(688,998		)	6,731,641		(408,382		)	6,176,918
Total	$	(584,463	)	$	10,230,641	$	(293,106	)	$	9,625,533

All of our master swap agreements include legally enforceable netting provisions that allow for offsetting of all contracts with a given counterparty in the event of default by one of the two parties. However, as indicated above, we report derivative asset and liability amounts on a gross basis based on individual contracts. The following table presents the gross fair value of derivative assets and liabilities reported on our condensed consolidated balance sheets as of February 29, 2016 and May 31, 2015, and provides information on the impact of netting provisions and collateral pledged.



	February 29, 2016
	Gross Amount of Recognized Assets/ Liabilities		Gross Amount Offset in the Balance Sheet		Net Amount of Assets/ Liabilities Presented in the Balance Sheet		Gross Amount Not Offset in the Balance Sheet
(Dollars in thousands)	Gross Amount of Recognized Assets/ Liabilities		Gross Amount Offset in the Balance Sheet				Financial Instruments		Cash Collateral Pledged		Net Amount
Derivative assets:
Interest rate swaps	$	104,535	$	—	$	104,535	$	104,535	$	—	$	—
Derivative liabilities:
Interest rate swaps	688,998		—		688,998		104,535		—		584,463



	May 31, 2015
	Gross Amount of Recognized Assets/ Liabilities		Gross Amount Offset in the Balance Sheet		Net Amount of Assets/ Liabilities Presented in the Balance Sheet		Gross Amount Not Offset in the Balance Sheet
(Dollars in thousands)	Gross Amount of Recognized Assets/ Liabilities		Gross Amount Offset in the Balance Sheet				Financial Instruments		Cash Collateral Pledged		Net Amount
Derivative assets:
Interest rate swaps	$	115,276	$	—	$	115,276	$	115,276	$	—	$	—
Derivative liabilities:
Interest rate swaps	408,382		—		408,382		115,276		—		293,106

Impact of Derivatives on Condensed Consolidated Statements of Operations

Derivative gains (losses) reported in our condensed consolidated statements of operations consist of derivative cash settlements and derivative forward value. Derivative cash settlements represent net contractual interest expense accruals on interest rate swaps during the period. The derivative forward value represents the change in fair value of our interest rate swaps during the reporting period due to changes in the estimate of future interest rates over the remaining life of our derivative contracts.

The following table presents the components of the derivative gains (losses) reported in our condensed consolidated statements of operations for our interest rate swaps for the three and nine months ended February 29, 2016 and February 28, 2015.



	Three Months Ended						Nine Months Ended
(Dollars in thousands)	February 29, 2016			February 28, 2015			February 29, 2016			February 28, 2015
Derivative cash settlements	$	(22,556	)	$	(21,512	)	$	(65,285	)	$	(63,377	)
Derivative forward value	(220,480		)	(77,258		)	(290,952		)	(159,832		)
Derivative losses	$	(243,036	)	$	(98,770	)	$	(356,237	)	$	(223,209	)

Credit-Risk-Related Contingent Features

Our derivative contracts typically contain mutual credit rating downgrade provisions, referred to as rating triggers. Under the mutual rating trigger provisions, a counterparty may, but is not obligated to, terminate and settle the agreement if the credit rating of the other counterparty falls to a level specified in the agreement. Our senior unsecured credit ratings from Moody’s and S&P were A2 and A, respectively, as of February 29, 2016. Moody’s had our ratings on stable outlook as of February 29, 2016, while S&P had our ratings on negative outlook as of February 29, 2016.

The table below displays the notional amounts of our derivative contracts with rating triggers as of February 29, 2016 and the payments that would be required if the contracts were terminated as of that date because of a downgrade of our unsecured credit ratings or the counterparty’s unsecured credit ratings below A3/A-, below Baa1/BBB+, to or below Baa2/BBB, below Baa3/BBB-, or to or below Ba2/BB+ by Moody’s or S&P, respectively. In calculating the payment amounts that would be required upon termination of the derivative contracts, we assumed that the amounts for each counterparty would be netted in accordance with the provisions of the master netting agreements for each counterparty. The net payment amounts are based on the fair value of the underlying derivative instrument, excluding the credit risk valuation adjustment, plus any unpaid accrued interest amounts.



(Dollars in thousands)	Notional Amount		Payable Due From CFC			Receivable Due to CFC		Net (Payable)/Receivable
Impact of mutual rating downgrade trigger:
Falls below A3/A-⁽¹⁾	$	63,295	$	(19,794	)	$	—	$	(19,794	)
Falls below Baa1/BBB+	6,556,100		(348,858		)	—		(348,858		)
Falls to or below Baa2/BBB ⁽²⁾	162,325		(3,955		)	—		(3,955		)
Falls below Baa3/BBB-	400,000		(31,606		)	—		(31,606		)
Total	$	7,181,720	$	(404,213	)	$	—	$	(404,213	)

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⁽¹⁾ Rating trigger for CFC falls below A3/A-, while rating trigger for counterparty falls below Baa1/BBB+ by Moody’s or S&P, respectively.

⁽²⁾ Rating trigger for CFC falls to or below Baa2/BBB, while rating trigger for counterparty falls to or below Ba2/BB+ by Moody’s or S&P, respectively.

The aggregate amount, including the credit risk valuation adjustment, of all interest rate swaps with rating triggers that were in a net liability position was $412 million as of February 29, 2016. There were no interest rate swaps with rating triggers that were in a net asset position as of February 29, 2016.