2011 PHFA Annual Report - Pennsylvania Housing Finance Agency

notes to
pennsylvania housing finance agency
financial state ments
Years Ended June 30, 2011 and 2010
7. Derivatives
In order to both reduce the Agency’s overall cost of borrowing long-term capital and protect
against the potential of rising interest rates, the Agency entered into pay-fixed, receive-variable
interest rate swap agreements. The objective of the swap agreements is to hedge against changes in
the cash flows on the related variable rate bonds series.
Interest rate swap agreements are recorded and reported as either a hedging derivative instrument
or investment derivative instrument based upon effectiveness of the agreements to hedge against
interest rate exposure associated with variable-rate debt. The regression analysis method is used to
determine whether the interest rate swap agreements are an effective hedge or not. The fair value
of hedging derivative instruments is presented on the Balance Sheets as a derivative instrument
liability (negative fair values amount.) Changes in fair values are recorded as a deferred outflow of
a resource (negative fair values change.) If the interest rate swap agreements change from being an
effective hedge to an ineffective hedge, they are recorded and reported as investment derivative
instruments. The fair values of investment derivative instruments are presented as derivative
instruments liabilities or assets; however, the changes in fair values are no longer deferred, but
recognized as investment revenue or expense.
Fair value amounts were obtained from mark to market statements from a third party analyst
and represent mid-market valuations that approximate the current economic value using market
averages, reference rates and/or mathematical models. The fair value represents the current price
to settle interest rate swap agreements assets or liabilities in the marketplace if interest rate swap
agreements were to be terminated.
Because interest rates have generally decreased since the interest rate swap agreements became
effective, all of the Agency’s interest rate swap agreements have a negative fair value as of
June 30, 2011. Changes in fair values are countered by reductions or increases in total interest
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payments required under variable-rate bonds. Given that payments on the Agency’s variable-rate
bonds adjust to changing interest rates, the associated debt does not have corresponding increases
in fair value.
Each of the Agency’s interest rate swap agreements requires the Agency to post collateral in the
event the fair value of the swap falls below specific thresholds of negative worth. As of June 30,
2011, the Agency was not required to post collateral for any of its outstanding swaps.
Hedging Derivative Instruments
The fair value balances and notional amounts of hedging derivative instruments outstanding
at June 30, 2011, and the changes in fair value of such derivative instruments for the year then
ended as reported in the 2011 basic financial statements are as follows:
Bond Notional Changes in Fair Value Fair Value at June 30, 2011
Series Amount Classification Amount Classification Amount
1999-67B $ 16,795 Deferred outflow $ 611 Hedging derivative $ (3,662)
2001-72C 9,830 Deferred outflow 432 Hedging derivative (1,694)
2002-74A 30,000 Deferred outflow 866 Hedging derivative (1,423)
2002-75A 30,000 Deferred outflow 576 Hedging derivative (1,425)
2003-77B 59,900 Deferred outflow 1,176 Hedging derivative (1,390)
2003-79B 57,350 Deferred outflow 1,462 Hedging derivative (6,911)
2004-81C 43,465 Deferred outflow (2,414) Hedging derivative (2,606)
2004-82B 33,965 Deferred outflow (1,051) Hedging derivative (4,081)
2004-82C 35,220 Deferred outflow 4,836 Hedging derivative (2,001)
2004-83B 17,345 Deferred outflow 121 Hedging derivative (1,109)
2004-83C 42,905 Deferred outflow 1,306 Hedging derivative (3,835)
2004-84C 9,470 Deferred outflow 134 Hedging derivative (560)
2004-84D 58,335 Deferred outflow 969 Hedging derivative (2,330)