Axalta Coating Systems Ltd

(19)FINANCIAL INSTRUMENTS, HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENTS

Fair value of financial instruments

Equity securities with readily determinable fair values - Balances of equity securities are recorded within other assets, with any changes in fair value recorded within other expense (income), net. The fair values of equity securities are based upon quoted market prices, which are considered Level 1 inputs.

Long-term borrowings - The estimated fair values of these borrowings are based on recent trades, as reported by a third-party pricing service. Due to the infrequency of trades, these inputs are considered to be Level 2 inputs.

Derivative instruments - The Company's interest rate swaps, cross-currency swaps and foreign currency forward contracts are valued using broker quotations, or market transactions in either the listed or over-the-counter markets. As such, these derivative instruments are included in the Level 2 hierarchy.

Fair value of contingent consideration

Contingent consideration is valued using a probability-weighted expected payment method that considers the timing of expected future cash flows and the probability of whether key elements of the contingent event are completed. The fair value of contingent consideration is valued at each balance sheet date, until amounts become payable, with adjustments recorded within other expense (income), net in the consolidated statements of operations. Due to the significant unobservable inputs used in the valuations, these liabilities are categorized within Level 3 of the fair value hierarchy.

The table below presents the fair values of our financial instruments measured on a recurring basis by level within the fair value hierarchy at December 31, 2023 and December 31, 2022.

(1)Cash flow hedge

(2)Net investment hedge

The table below presents a roll forward of activity for the Level 3 liabilities for the year ended December 31, 2023.

Derivative Financial Instruments

We selectively use derivative instruments to reduce market risk associated with changes in foreign currency exchange rates and interest rates. The use of derivatives is intended for hedging purposes only, and we do not enter into derivative instruments for speculative purposes. A description of each type of derivative used to manage risk is included in the following paragraphs and our policies regarding accounting treatments of derivative movements are detailed in Note 1.

Derivative Instruments Qualifying and Designated as Cash Flow and Net Investment Hedges

Interest Rate Caps Designated as Cash Flow Hedges

During the year ended December 31, 2017, we entered into four 1.5% interest rate caps with aggregate notional amounts totaling $850.0 million to hedge the variable interest rate exposures on our 2024 Dollar Term Loans. The final interest rate cap entered into during 2017, comprising $250.0 million of notional value, expired December 31, 2021 and had a deferred premium of $8.1 million at inception. All deferred premiums were paid quarterly over the term of the respective interest rate caps.

Interest Rate Swaps Designated as Cash Flow Hedges

During the three months ended June 30, 2018, we entered into three interest rate swaps with aggregate notional amounts totaling $475.0 million to hedge interest rate exposures related to variable rate borrowings under the 2024 Dollar Term Loans (which were subsequently replaced with the 2029 Dollar Term Loans). Under the terms of the interest rate swap agreements, the Company was required to pay the counterparties a stream of fixed interest payments at a rate of 2.72% and in turn, received variable interest payments based on 3-month LIBOR from the counterparties. The interest rate swaps were designated as cash flow hedges and expired on March 31, 2023.

We refinanced our 2024 Dollar Term Loans in December 2022 and as a result transitioned the variable interest rate benchmark from LIBOR to SOFR. Despite the differing interest rate benchmarks between the interest rate swaps and the 2029 Dollar Term Loans, the interest rate swaps continue to qualify as cash flow hedges in accordance with FASB's Topic 848, "Reference Rate Reform."

During the three months ended March 31, 2019, we entered intotwo interest rate swaps with aggregate notional amounts totaling $500.0 million, effective December 31, 2019, to hedge interest rate exposure associated with the 2024 Dollar Term Loans (which were subsequently replaced with the 2029 Dollar Term Loans). Under the terms of the interest rate swap agreements, the Company was required to pay the counterparties a stream of fixed interest payments at a rate of 2.59% and in turn, received variable interest payments based on 3-month LIBOR from the counterparties. The interest rate swaps were designated as cash flow hedges and expired on December 31, 2022.

During the three months ended March 31, 2020, we entered intotwo interest rate swaps with aggregate notional amounts totaling $400.0 million to hedge interest rate exposures associated with the 2024 Dollar Term Loans (which were subsequently replaced with the 2029 Dollar Term Loans). Under the terms of the interest rate swap agreements, the Company was required to pay the counterparties a stream of fixed interest payments at rates of 1.61% and 1.18% on $200.0 million of notional value for each instrument, and in turn, received variable interest payments based on 3-month LIBOR from the counterparties. The interest rate swaps were designated as cash flow hedges and expired on December 31, 2022.

During the three months ended March 31, 2023, we entered intoone interest rate swap with a notional amount of $150.0 million to hedge interest rate exposures associated with the 2029 Dollar Term Loans. Under the terms of the interest rate swap agreement, the Company is required to pay the counterparty a stream of fixed interest payments at rates between 0.5% and 4.256% on $150.0 million of notional value, and in turn, receives variable interest payments based on 3-month SOFR from the counterparty. The interest rate swap is designated as a cash flow hedge and expires on March 31, 2024.

Gains and losses for hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis.

Cross-Currency Swaps Designated as Net Investment Hedges

During the three months ended December 31, 2018, we notionally exchanged $475.0 million at a weighted average interest rate of 4.47% for €416.6 million at a weighted average interest rate of 1.44%. The cross-currency swaps were designated as net investment hedges and expired on March 31, 2023.

During the three months ended December 31, 2020, the Company notionally exchanged $396.3 million at a weighted average interest rate of 3.375% for €335.0 million at a weighted average interest rate of 2.15%. The cross-currency swaps were designated as net investment hedges and were set to expire on February 15, 2029. During March 2022, these were settled resulting in cash proceeds of $25.0 million. Concurrently, the Company notionally exchanged $365.5 million at a weighted average interest rate of 3.375% for €335.0 million at a weighted average interest rate of 2.04%. The cross-currency swaps are designated as net investment hedges and expire on February 15, 2029.

During the three months ended March 31, 2023, three fixed-for-fixed cross-currency swaps with an aggregate notional amount totaling $475.0 million, previously executed in 2018 and discussed above, matured resulting in net cash proceeds of $29.4 million. Concurrently, the Company notionally exchanged $150.0 million at an interest rate of 7.256% for €142.3 million at an interest rate of 5.697%. The cross-currency swap is designated as a net investment hedge and expires on March 31, 2024.

During the three months ended December 31, 2023, the Company notionally exchanged $500.0 million at a weighted average interest rate of 7.25% for €467.0 million at a weighted average interest rate of 5.6225%. The cross-currency swaps were designated as a net investment hedge and expire on November 15, 2026.

The following tables set forth the locations and amounts recognized during the year ended December 31, 2023, 2022 and 2021 for these cash flow and net investment hedges.

Over the next 12 months, we expect a gain of $0.4 million pertaining to cash flow hedges to be reclassified from AOCI into earnings, related to our interest rate swaps.

Derivative Instruments Not Designated as Cash Flow Hedges

We periodically enter into foreign currency forward and option contracts to reduce market risk and hedge our balance sheet exposures and cash flows for subsidiaries with exposures denominated in currencies different from the functional currency of the relevant subsidiary. These contracts have not been designated as hedges and all gains and losses are marked to market through other expense (income), net in the consolidated statement of operations.

Fair value gains and losses of derivative contracts, as determined using Level 2 inputs, that have not been designated for hedge accounting treatment are recorded in earnings as follows: