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These excerpts taken from the WEN 10-K filed Mar 14, 2008. Interest Rate
Swaps — Designated
Hedging
instruments are designated, as appropriate, as cash flow hedges based upon the
specifically identified exposure, which may be an individual item or a group of
similar items. Hedged exposure is primarily interest expense on forecasted
rollover or re-issuance of repurchase agreements for a specified future time
period and the hedged risk is the variability in those payments due to changes
in the benchmark interest rate. Hedging transactions are structured at inception
so that the notional amounts of the hedges are matched with an equal amount of
repurchase agreements forecasted to be outstanding in that specified period for
which the borrowing rate is not yet fixed. Cash flow hedging strategies include
the utilization of interest rate swaps and interest rate swap forwards. Any
ineffectiveness in the hedging relationship is recognized in interest expense
during the period in which it arises. Prior to the end of the specified hedge
period, the effective portion of all contract gains and losses excluding the net
interest accrual is recorded in other comprehensive loss. Realized gains and
losses on terminated contracts are maintained in other comprehensive loss
until
- 45 -
DEERFIELD CAPITAL CORP. AND ITS
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS — (Continued)
reclassified
into earnings as an adjustment to interest expense over the contract’s original
contractual life. Hedging instruments under these strategies are deemed to be
designated to the outstanding repurchase agreements and the forecasted rollover
thereof. As of December 31, 2007 and 2006, the maximum length of time over which
the Company was hedging its exposure to the variability of future cash flows for
forecasted transactions is approximately 10 years.
For the years
ended December 31, 2007, 2006 and 2005, the Company recognized a net decrease to
interest expense of $48.4 million, $48.7 million, and a net increase of $10.6
million, respectively, related to designated cash flow hedging. Included in
these amounts was the effect of ineffectiveness, which increased interest
expense $4.2 million, $0.2 million and $0.3 for the years ended December 31,
2007, 2006 and 2005, respectively. The weighted average fixed rate payable on
the cash flow hedges as of December 31, 2007 and 2006 was 4.75% and 4.54%,
respectively. As of December 31, 2007 and 2006, the Company held 134 and 207
designated interest rate swaps with notional amounts outstanding of $3.8 billion
and $6.1 billion, respectively. Based on amounts included in the accumulated
other comprehensive loss as of December 31, 2007 from designated interest rate
swaps, the Company expects to recognize an increase of approximately $24.9
million in interest expense over the next 12 months.
During the
year ended December 31, 2007, the Company de-designated $2.1 billion (notional)
of interest rate swaps previously designated as a hedge with a net negative fair
value of $19.3 million at de-designation. A deferred loss of $10.6 million is
included in other comprehensive loss for the de-designations which will be
amortized into interest expense over the original term of the hedging
relationship. The de-designation occurred as a result of changing risk exposure
in repurchase agreement financing.
In November
2005, the Company entered into a designated swap in Pinetree CDO that contained
a financing element, resulting in the receipt of a $3.7 million cash payment
that is being repaid through an above-market interest rate over the life of the
swap. During December 2006, the Company renegotiated the terms of the swap
contract to lower the fixed rate to 5.50% or a decrease of 0.923% from the
previous rate for the period from October 5, 2006 through April 5, 2007 and
increasing the fixed rate to 6.53% or an increase of 0.107% from the previous
rate for the period from April 6, 2007 until maturity on April 7, 2015. In
connection with the sale of Pinetree CDO preference shares this swap was not
included on the Company’s balance sheet as of December 31, 2007.
Interest Rate Swaps — Designated Hedging instruments are designated, as appropriate, as cash flow hedges based upon the specifically identified exposure, which may be an individual item or a group of similar items. Hedged exposure is primarily interest expense on forecasted rollover or re-issuance of repurchase agreements for a specified future time period and the hedged risk is the variability in those payments due to changes in the benchmark interest rate. Hedging transactions are structured at inception so that the notional amounts of the hedges are matched with an equal amount of repurchase agreements forecasted to be outstanding in that specified period for which the borrowing rate is not yet fixed. Cash flow hedging strategies include the utilization of interest rate swaps and interest rate swap forwards. Any ineffectiveness in the hedging relationship is recognized in interest expense during the period in which it arises. Prior to the end of the specified hedge period, the effective portion of all contract gains and losses excluding the net interest accrual is recorded in other comprehensive loss. Realized gains and losses on terminated contracts are maintained in other comprehensive loss until - 45 - DEERFIELD CAPITAL CORP. AND ITS SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued) reclassified into earnings as an adjustment to interest expense over the contract’s original contractual life. Hedging instruments under these strategies are deemed to be designated to the outstanding repurchase agreements and the forecasted rollover thereof. As of December 31, 2007 and 2006, the maximum length of time over which the Company was hedging its exposure to the variability of future cash flows for forecasted transactions is approximately 10 years. For the years ended December 31, 2007, 2006 and 2005, the Company recognized a net decrease to interest expense of $48.4 million, $48.7 million, and a net increase of $10.6 million, respectively, related to designated cash flow hedging. Included in these amounts was the effect of ineffectiveness, which increased interest expense $4.2 million, $0.2 million and $0.3 for the years ended December 31, 2007, 2006 and 2005, respectively. The weighted average fixed rate payable on the cash flow hedges as of December 31, 2007 and 2006 was 4.75% and 4.54%, respectively. As of December 31, 2007 and 2006, the Company held 134 and 207 designated interest rate swaps with notional amounts outstanding of $3.8 billion and $6.1 billion, respectively. Based on amounts included in the accumulated other comprehensive loss as of December 31, 2007 from designated interest rate swaps, the Company expects to recognize an increase of approximately $24.9 million in interest expense over the next 12 months. During the year ended December 31, 2007, the Company de-designated $2.1 billion (notional) of interest rate swaps previously designated as a hedge with a net negative fair value of $19.3 million at de-designation. A deferred loss of $10.6 million is included in other comprehensive loss for the de-designations which will be amortized into interest expense over the original term of the hedging relationship. The de-designation occurred as a result of changing risk exposure in repurchase agreement financing. In November 2005, the Company entered into a designated swap in Pinetree CDO that contained a financing element, resulting in the receipt of a $3.7 million cash payment that is being repaid through an above-market interest rate over the life of the swap. During December 2006, the Company renegotiated the terms of the swap contract to lower the fixed rate to 5.50% or a decrease of 0.923% from the previous rate for the period from October 5, 2006 through April 5, 2007 and increasing the fixed rate to 6.53% or an increase of 0.107% from the previous rate for the period from April 6, 2007 until maturity on April 7, 2015. In connection with the sale of Pinetree CDO preference shares this swap was not included on the Company’s balance sheet as of December 31, 2007. | EXCERPTS ON THIS PAGE:
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