Derivatives and hedging activities

Belmond hedges its interest rate risk, ensuring that an element of its floating rate interest is fixed by using interest rate derivatives. Belmond designates these derivatives as cashflow hedges. Additionally, Belmond designates its foreign currency borrowings and currency derivatives as net investment hedges of overseas operations.

In connection with the July 2017 Amended and Restated Credit Agreement and the June 2018 refinancing of the Charleston Center LLC debt, the interest rate derivatives associated with the previous term loan facility and the previous Charleston Center LLC secured loan were terminated. See Note 12. All amounts in other comprehensive income/(loss) relating to these derivatives will be amortized to interest expense over the remaining original life of the interest rate derivative under ASC 815 Derivatives and Hedging. New interest rate derivatives were entered into to fix an element of the floating interest rate on the Amended and Restated Credit Agreement and the Charleston Center LLC debt.

In connection with the Charleston Center LLC debt, the interest rate derivatives termination resulted in an inflow of $359,000 during the year ended December 31, 2018.

Cash flow hedges of interest rate risk

As of December 31, 2018 and 2017, Belmond 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:



	2018		2017
December 31,	$’000		$’000

Interest rate swaps	€	89,500	€	89,500
Interest rate swaps	$	280,000	$	243,000
Interest rate caps	$	48,000	$	17,200

Fair value

The table below presents the fair value of Belmond’s derivative financial instruments and their classification as of December 31, 2018 and 2017:



		Fair value as of		Fair value as of
		December 31, 2018		December 31, 2017
	Balance sheet location	$’000		$’000
Derivatives designated in a cash flow hedging relationship:
Interest rate derivatives	Other assets	2,112		1,776
Interest rate derivatives	Other receivables	1,340		—
Interest rate derivatives	Accrued liabilities	(439	)	(858	)
Interest rate derivatives	Other liabilities	(1,258	)	—
Other derivative instruments
Contractual liabilities	Accrued liabilities	(12,200	)	—
Contractual liabilities	Other liabilities	(800	)	—

Total		(11,245	)	918

Offsetting

There was no offsetting within derivative assets or derivative liabilities at December 31, 2018 and 2017. However, derivatives are subject to master netting arrangements.

The Company's derivative contracts are subject to a master netting arrangement with the respective counterparties that provide for the net settlement of all derivative contracts in the event of default or upon the occurrence of certain termination events. Upon exercise of termination rights by the non-defaulting party (i) all transactions are terminated, (ii) all transactions are valued and the positive value transactions are netted against the negative value transaction, and (iii) the only remaining payment obligation is of one of the parties to pay the netted termination amount.

The Company has elected to present the derivative assets and derivative liabilities on the balance sheet on a gross basis for periods ended December 31, 2018 and December 31, 2017. The tables below present the derivative assets and liability balance, before and after the effects of offsetting, as of December 31, 2018 and December 31, 2017.



	December 31, 2018
	Gross amounts presented in the consolidated balance sheet		Gross amounts not offset in the consolidated balance sheet subject to netting agreements		Net amounts
	$'000		$’000		$’000

Total asset derivatives	3,258		(618	)	2,640
Total liability derivatives	(1,514	)	618		(896	)

	December 31, 2017
	Gross amounts presented in the consolidated balance sheet		Gross amounts not offset in the consolidated balance sheet subject to netting agreements		Net amounts
	$'000		$’000		$’000

Total asset derivatives	1,365		(232	)	1,133
Total liability derivatives	(423	)	232		(191	)

Other comprehensive income/(loss)

Information concerning the movements in other comprehensive income/(loss) for cash flow hedges of interest rate risk is shown in Note 24. At December 31, 2018, the amount accounted for in other comprehensive income/(loss) which is expected to be reclassified to interest income in the next 12 months is $51,000. Movement in other comprehensive income/(loss) for net investment hedges recorded through foreign currency translation adjustments for the year ended December 31, 2018 was a $9,819,000 gain (2017 - $22,612,000 loss; 2016 - $4,975,000 gain).

Credit-risk-related contingent features

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

As of December 31, 2018, the fair value of derivatives, which includes accrued interest and an adjustment for non-performance risk, related to these agreements was $1,752,000 (2017 - $918,000 net asset). If Belmond breached any of the provisions, the obligations under the agreements would be settled at termination value of $1,742,000 inflow (2017 - $942,000 inflow).

Non-derivative financial instruments — net investment hedges

Belmond 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. Belmond’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 notional value of non-derivative hedging instruments was $201,780,000 at December 31, 2018 (2017 - $213,350,000), being a liability of Belmond.

Other derivative instrument - termination of the right of first refusal and purchase option

On July 6, 2018, the Company entered into an agreement with Mr. Sherwood that terminated a right of first refusal and purchase option. See Note 21. In exchange, Mr. Sherwood is entitled to an aggregate amount of $3,000,000, payable over a period of two years in three installments. Moreover, in the event of a sale of the Belmond Hotel Cipriani or a change in control of the Company within a ten year period following execution of the agreement, the Company would pay to Mr. Sherwood $10,000,000 if such an event happens within a year of the agreement, stepping down by $1,000,000 a year to zero after ten years. Mr. Sherwood would also receive a payment of $25,000,000, less any payments already made under the agreement and with no additional payments due to him thereafter under the agreement, in the event of either (1) a public offer for the Company being made within six months after the execution of the agreement and the closing of a change of control transaction for the Company occurring within six months after such offer was made or (2) a sale of the Belmond Hotel Cipriani within one year after the execution of the agreement.

The estimated costs to terminate the right of first refusal and purchase option have been accounted for in accordance with ASC 815, Derivatives and Hedging as the recognition criteria for a derivative have been met, specifically that the agreement provides for a payment linked to an underlying variable as set forth in ASC 815. During the year ended December 31, 2018, the Company has recognized a cost of $13,000,000 following an assessment of the fair value of any potential payment due on a change of control of the Company which is based on the relative probabilities of a change of control and of the various possible outcomes. This cost is included within selling, general and administrative expenses in statements of consolidated operations. See Note 22.