HireRight Holdings Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments

Derivative Instruments

9 Months Ended

Sep. 30, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company is exposed to changes in interest rates as a result of the Company’s financing activities used to fund business operations. Primary exposures include movements in LIBOR. The nature and amount of the Company’s long-term debt can be expected to vary as a result of future business requirements, market conditions and other factors. To minimize this risk, the Company entered into interest rate swap agreements, effective September 26, 2019 for a total notional amount of $700 million (the “Interest Rate Swap Agreements”). The Interest Rate Swap Agreements are designed to provide predictability against changes in the interest rates on the Company’s debt, as the Interest Rate Swap Agreements convert a portion of the variable interest rate on the Company’s debt to a fixed rate. The Interest Rate Swap Agreements expire on December 31, 2023.

The Company has elected hedge accounting treatment for the Interest Rate Swap Agreements. To ensure the effectiveness of the Interest Rate Swap Agreements, the Company elected the one-month LIBOR rate option for its variable rate interest payments on term balances equal to or in excess of the applicable notional amount of the interest rate swap agreement as of each reset date. The reset dates and other critical terms on the term loans perfectly match with the interest rate cap reset dates and other critical terms during the three and nine months ended September 30, 2021 and 2020. At September 30, 2021 and December 31, 2020, the effective portion of the Interest Rate Swap Agreements was included on the condensed consolidated balance sheet in accumulated other comprehensive income (loss).

During the three and nine months ended September 30, 2021 and 2020, the Company reclassified interest expense related to hedges of these transactions into earnings in the following amounts:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020
	(in thousands)
Interest expense reclassified into earnings	$	5,018	$	4,854	$	14,733	$	11,136

For derivative instruments that qualify for hedge accounting treatment, the fair value is recognized on the Company’s condensed consolidated balance sheets as derivative assets or liabilities with offsetting changes in fair

value, to the extent effective, recognized in accumulated other comprehensive income (loss) until reclassified into earnings when the related transaction occurs. The portion of a cash flow hedge that does not offset the change in the fair value of the transaction being hedged, which is commonly referred to as the ineffective portion, is immediately recognized in earnings. No portion of the cash flow hedge was ineffective during the three and nine months ended September 30, 2021 and 2020.

The fair value of the Interest Rate Swap Agreements was as follows:


	September 30, 2021
	Markets for Identical Assets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)		Total
	(in thousands)
Derivative instruments, current	$	—	$	18,772	$	—	$	18,772
Derivative instruments, long-term	—		19,097		—		19,097
Total liabilities measured at fair value	$	—	$	37,869	$	—	$	37,869


	December 31, 2020
	Markets for Identical Assets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)		Total
	(in thousands)
Derivative instruments, current	$	—	$	18,258	$	—	$	18,258
Derivative instruments, long-term	—		35,317		—		35,317
Total liabilities measured at fair value	$	—	$	53,575	$	—	$	53,575

There were no amounts excluded from the measurement of hedge effectiveness at September 30, 2021 and December 31, 2020. Please see Note 10 — Accumulated Other Comprehensive Income (Loss) for further information. Also see Note 7 — Fair Value Measurements for further information on the Company’s derivative instruments.

The results of derivative activities are recorded in cash flows from operating activities on the condensed consolidated statements of cash flows.