Derivative Instruments

3 Months Ended

Mar. 31, 2012

Note 10. Derivative Instruments

We enter into derivative instruments for risk management purposes, including derivatives designated as hedging instruments, derivates designated as net investment hedges and those utilized as economic hedges. We use derivatives to manage exposure to fluctuations in interest rates and currency exchange rates.

Interest Rate Caps

At March 31, 2012 and December 31, 2011, we had deferred premium interest rate caps agreements, which are denominated in U.S. dollars (notional amount of $1.4 billion at March 31, 2012 and $1.5 billion at December 31, 2011) and Euros (notional amount of €187.0 million at March 31, 2012 and €193.6 million at December 31, 2011) (the “Cap Agreements”) to effectively cap the annual interest expense applicable to our borrowings under the Credit Agreement at a maximum of 4.75% for U.S. Dollar denominated borrowings and 5.0% for Euro denominated borrowings. The deferred premium associated with the Cap Agreements was $36.3 million for the U.S. Dollar denominated exposure and €5.6 million for the Euro denominated exposure at March 31, 2012 and $38.2 million for the U.S. Dollar denominated exposure and €6.0 million for the Euro denominated exposure at December 31, 2011.

Under the terms of the Cap Agreements, if LIBOR/EURIBOR resets above a strike price, we will receive the net difference between the rate and the strike price. As disclosed in Note 6, we have elected our applicable rate per annum as Euro currency. In addition, on the quarterly settlement dates, we will remit the deferred premium payment (plus interest) to the counterparty, whether LIBOR/EURIBOR resets above or below the strike price.

The Cap Agreements are designated as cash flow hedges and to the extent they are effective in offsetting the variability of the variable rate interest payments, changes in the derivatives’ fair values are not included in current earnings but are included in accumulated other comprehensive income (AOCI) in the accompanying consolidated balance sheets. At each cap maturity date, the portion of fair value attributable to the matured cap will be reclassified from AOCI into earnings as a component of interest expense.

From time to time as we prepay portions of the Term Loan, we may modify our interest rate cap to reduce the notional amount. The terms of the caps will not otherwise be revised by these modifications. On the modification date, the portion of fair value attributable to the modified cap will be reclassified from AOCI into earnings as a component of interest expense.

Cross-currency Rate Swaps

During the quarter ended March 31, 2012, we entered into cross-currency rate swaps with an aggregate notional value of $230 million to hedge the net investment in a European subsidiary, Burger King Europe. These swaps are contracts to exchange quarterly fixed-rate payments we make in Euros for quarterly fixed-rate payments we receive in U.S. dollars. Changes in the fair value of these instruments are immediately recognized in AOCI to offset the change in the carrying amount of the net investment being hedged. These instruments mature on October 19, 2016.

Currency effects of these hedges reflected in AOCI were an after-tax loss of $5.9 million for the three months ended March 31, 2012.

Interest Rate Swaps

In connection with 3G’s acquisition of our Company, interest rate swaps with a notional value of $500 million were terminated. The remaining interest rate swaps that were not terminated by counterparties had a notional value of $75 million and expired on September 30, 2011.

Foreign Currency Forward Contracts

From time to time, we enter into foreign currency forward contracts to economically hedge the remeasurement of certain foreign currency-denominated intercompany loans receivable and other foreign-currency denominated assets recorded in our consolidated balance sheets. We had no foreign currency forward contracts outstanding as of March 31, 2012.

Credit Risk

By entering into derivative instrument contracts, we are exposed to counterparty credit risk. Counterparty credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is in an asset position, the counterparty has a liability to us, which creates credit risk for us. We attempt to minimize this risk by selecting counterparties with investment grade credit ratings and regularly monitoring our market position with each counterparty.

Credit-Risk Related Contingent Features

Our derivative instruments do not contain any credit-risk related contingent features.

The following table presents the required quantitative disclosures for our derivative instruments:


	Three Months Ended March 31,
	2012											2011
	Interest Rate Caps			Cross Currency Rate Swaps			Foreign Currency Forward Contracts		Total			Interest Rate Caps		Interest Rate Swaps		Foreign Currency Forward Contracts			Total
Derivatives designated as cash flow hedging instruments:
Gain (loss) recognized in other comprehensive income (effective portion)	$	(3.7	)	$	—		$	—	$	(3.7	)	$	4.2	$	—	$	(0.1	)	$	4.1
Gain (loss) reclassified from AOCI into interest expense, net ⁽¹⁾	$	(0.6	)	$	—		$	—	$	(0.6	)	$	1.0	$	—	$	0.1		$	1.1

Derivatives designated as net investment hedges:
Gain (loss) recognized in other comprehensive income (effective portion)	$	—		$	(9.7	)	$	—	$	(9.7	)	$	—	$	—	$	—		$	—

Derivatives not designated as hedging instruments:
Gain (loss) recognized in other operating expense, net	$	—		$	—		$	—	$	—		$	—	$	—	$	0.2		$	0.2
Gain (loss) recognized in interest expense, net	$	—		$	—		$	—	$	—		$	—	$	1.0	$	—		$	1.0

(1)	Includes $0.1 million in losses for the three months ended March 31, 2012, and $1.0 million in gains for the three months ended March 31, 2011, related to the interest rate caps modified in connection with the amendment to the Credit Agreement.

The net amount of pre-tax gains and losses in accumulated comprehensive income (loss) as of March 31, 2012 that we expect to be reclassified into earnings within the next 12 months is $4.7 million of losses.

- Definition

The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items.

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+ Details

Burger King Holdings Inc 10-Q