Derivatives and hedging activities

12 Months Ended

Dec. 31, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and hedging activities

Derivatives and hedging activities

Risk management objective of using derivatives

OEH enters into derivative financial instruments with the objective to manage its exposures to future movements in interest rates on its borrowings.

Cash flow hedges of interest rate risk

OEH’s objective in using interest rate derivatives is to add certainty and stability to its interest expense and to manage its exposure to interest rate movements. To accomplish this objective, OEH primarily uses interest rate swaps as part of its interest rate risk management strategy. An interest rate swap is a transaction between two parties in which each agrees to exchange, or swap, interest payments where the interest payment amounts are tied to different interest rates or indices for a specified period of time and are based on a notional amount of principal.  During the year ended December 31, 2012, interest rate swaps were used to hedge the variable cash flows associated with existing variable interest rate debt.

Derivative instruments are recorded on the balance sheets at fair value.  The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in other comprehensive income/(loss) and is subsequently reclassified into earnings in the period that the hedged forecast transaction affects earnings.  The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings.

As of December 31, 2012, OEH had the following outstanding interest rate derivatives stated at their notional amounts in local currency that were designated as cash flow hedges of interest rate risk:

	2012		2011
December 31,	’000		’000
Interest Rate Swaps	A$	—	A$	10,800
Interest Rate Swaps	€	142,094	€	148,332
Interest Rate Swaps	$	104,259	$	117,765

Non-designated hedges of interest rate risk

Derivatives not designated as hedges are used to manage OEH’s exposure to interest rate movements but do not meet the strict hedge accounting requirements prescribed in the authoritative accounting guidance.  As of December 31, 2012, OEH had interest rate options with a fair value of $6,000 (2011 - $60,000) and a notional amount of €76,469,000 and $53,760,000 (2011 - €43,594,000 and $54,880,000) that were non-designated hedges of OEH’s exposure to interest rate risk.

The table below presents the fair value of OEH’s derivative financial instruments and their classification as of December 31, 2012 and 2011:

	Liability Derivatives
		Fair value as of		Fair value as of
		December 31, 2012		December 31, 2011
	Balance Sheet location	$’000		$’000
Derivatives designated in a cash flow hedging relationship:
Interest Rate Swaps	Other assets	—		—
Interest Rate Swaps	Accrued liabilities	(3,858	)	(3,443	)
Interest Rate Swaps	Other liabilities	(5,021	)	(7,511	)
Total		(8,879	)	(10,954	)
Derivatives not designated as hedging instruments:
Interest Rate Options	Other Assets	6		60
Interest Rate Swaps	Accrued liabilities	—		—
Interest Rate Swaps	Other liabilities	—		—
Total		6		60

The table below (in which “OCI” means other comprehensive income) presents the effect of OEH’s derivative financial instruments on the statements of consolidated operations and the statements of consolidated comprehensive income for the years ended December 31, 2012 and 2011:

	2012		2011		2010
Year ended December 31,	$’000		$’000		$’000
Interest rate swaps designated as hedging instruments:
Beginning accumulated other comprehensive loss	(6,440	)	(8,745	)	(11,275	)
Amount of loss recognized in OCI (effective portion)	(7,032	)	(7,566	)	(8,385	)
Amount of loss reclassified from accumulated OCI into interest income (effective portion)	6,129		8,789		11,027
Deferred tax on OCI movement	1,367		1,082		(112	)
Change in fair value, net of tax	464		2,305		2,530
Ending accumulated other comprehensive loss	(5,976	)	(6,440	)	(8,745	)
Amount of loss recognized in interest expense on derivatives (ineffective portion)	218		(353	)	(534	)
Derivatives not designated as hedging instruments:
Amount of (loss)/gain recognized in interest expense	(54	)	484		(2,217	)

At December 31, 2012, the amount accounted for in other comprehensive income/(loss) which is expected to be reclassified to interest expense in the next 12 months is $3,602,000 (2011 - $3,080,000).

Credit-risk-related contingent features

OEH has agreements with some of its derivative counterparties that contain provisions under which, if OEH defaults on the debt associated with the hedging instrument, OEH could also be declared in default in respect of its derivative obligations.

As of December 31, 2012, the fair value of derivatives in a net liability position, which includes accrued interest and an adjustment for non-performance risk, related to these agreements was $8,879,000 (2011 - $10,954,000). As of December 31, 2012, OEH had cash collateral of $Nil (2011 - $Nil) with its derivative counterparties in respect of these net liability positions. If OEH breached any of the provisions, it would be required to settle its obligations under the agreements at their termination value of $8,946,000 (2011 - $11,551,000).

Non-derivative financial instruments — net investment hedges

OEH uses certain of its debt denominated in foreign currency to hedge portions of its net investments in foreign operations against adverse movements in exchange rates. OEH’s designates its euro-denominated indebtedness as a net investment hedge of long-term investments in its euro-functional subsidiaries.  These contracts are included in non-derivative hedging instruments. The fair values of non-derivative hedging instruments were $44,166,000 at December 31, 2012 (2011 - $45,919,000), both being liabilities of OEH. Amounts recorded in other comprehensive income/(loss) were a $806,000 loss for the year ended December 31, 2012 (2011 - $2,748,000 gain; 2010 - $4,398,000 gain).