HireRight Holdings Corporation Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

Derivative Instruments

Derivative Instruments

12 Months Ended

Dec. 31, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company had entered into interest rate swap agreements with a total original notional amount of $700.0 million with an effective date of December 31, 2018. 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 were not designated as a cash flow hedge and, accordingly, were presented at fair value in the consolidated balance sheet with both realized and unrealized gains and losses included in the consolidated statements of operations. The interest rate swap agreements originally expired on December 31, 2023.

On September 26, 2019, the Company modified the terms of the three existing swap agreements (“Interest Rate Swap Agreements”) with the then existing counterparties to change the LIBOR reference period to one month. The notional amount and maturities of the interest rate swap agreements remained unchanged. The Company elected hedge accounting treatment at that time. 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 matched with the interest rate cap reset dates and other critical terms during the years ended December 31, 2021 and 2020. At December 31, 2021 and 2020, the effective portion of the Interest Rate Swap Agreements was included on the consolidated balance sheets in accumulated other comprehensive income (loss).

During the period from September 26, 2019 to December 31, 2019, the Company reclassified $1.9 million from other comprehensive (loss) income into interest expense related to hedges of these transactions into earnings. During the years ended December 31, 2021 and 2020, the Company reclassified interest expense related to hedges of these transactions into earnings of $19.7 million and $16.0 million, respectively.

For derivative instruments that qualify for hedge accounting treatment, the fair value is recognized on the Company’s 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 years ended December 31, 2021 and 2020.

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


	December 31, 2021
	(in thousands)
	Markets for Identical Assets (Level 1)		Observable Inputs (Level 2)		Unobservable Inputs (Level 3)		Total
Derivative instruments, short-term	$	—	$	16,662	$	—	$	16,662
Derivative instruments, long-term	—		11,444		—		11,444
Total liabilities measured at fair value	$	—	$	28,106	$	—	$	28,106


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

Prior to the designation on September 26, 2019 of the Interest Rate Swap Agreements as cash flow hedges which qualified for hedge accounting treatment, the Company recorded losses as follows:


		Year Ended December 31,
		2021		2020		2019

Derivative type	Consolidated statement of operations location	(in thousands)
Interest rate swap	Change in fair value of derivative instruments	$	—	$	—	$	26,393

There were no amounts excluded from the measurement of hedge effectiveness at December 31, 2021 and 2020. The effective portions of the Interest Rate Swap Agreements are recorded as Unrealized gain (loss) on interest rate swaps on the consolidated statements of comprehensive loss. Please see Note 12 — Accumulated Other Comprehensive Income (Loss) for further information.

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

On February 18 and 22, 2022, the Company terminated the interest rate swap agreements discussed above. For further information, see “Note 23 — Subsequent Events