Financial Instruments

3 Months Ended

Mar. 31, 2012

Financial Instruments [Abstract]

Financial Instruments

9. Financial Instruments

The Company uses derivative financial instruments as part of its overall strategy to manage its exposure to market risks primarily associated with fluctuations in foreign currency and interest rates. The Company does not use derivatives for trading or speculative purposes.

As of March 31, 2012, the Company had a net liability position of $5 million related to derivative financial instruments associated with its euro denominated and floating rate debt, its foreign currency denominated receivables and payables, and forecasted earnings of its foreign subsidiaries.

Interest Rate Risk

A portion of the Company’s long-term debt is exposed to interest rate fluctuations. The Company uses hedging strategies and derivative financial instruments to create an appropriate mix of fixed and floating rate debt. The primary interest rate exposure as of March 31, 2012 was to interest rate fluctuations in the United States and Europe, specifically the impact of USLIBOR and EURIBOR interest rates on the variable rate borrowings. During the three months ended March 31, 2012, the Company used interest rate swaps as the derivative financial instruments in these hedging strategies. In previous periods, the Company has also used cross currency swaps as the derivative financial instruments in these hedging strategies. The Company does not designate these interest rate or cross currency swaps as accounting hedges; therefore, the fluctuations in the value of these contracts are recorded within the Company’s consolidated condensed statements of operations, which largely offset the impact of the changes in the value of the underlying risk they are intended to economically hedge. The fair value and the impact of the changes in the fair value of these interest rate and cross currency swaps are presented in the tables below.

Foreign Currency Risk

The Company uses foreign currency forward contracts to manage its exposure to changes in foreign currency exchange rates associated with its euro denominated debt, its foreign currency denominated receivables and payables, and forecasted earnings of its foreign subsidiaries (primarily to manage its foreign currency exposure to the British pound, Euro and Australian dollar). The Company does not designate these forward contracts as cash flow hedges; therefore, the fluctuations in the value of these forward contracts are recorded within the Company’s consolidated condensed statements of operations, which partially offset the impact of the changes in the value of the euro denominated debt, foreign currency denominated receivables and payables and forecasted earnings they are intended to economically hedge. The fair value of all the forward contracts and the impact of the changes in the fair value of these forward contracts are presented in the tables below.

Fair Value Disclosures for Derivative Instruments

The Company’s financial assets and liabilities recorded at fair value on a recurring basis consist primarily of derivative instruments. These amounts have been categorized based upon a fair value hierarchy and were all categorized as Level 3 — Significant Unobservable Inputs as of March 31, 2012 and December 31, 2011.

The fair value of interest rate swap derivative financial instruments is determined using pricing models based on discounted cash flows that use inputs from actively quoted markets for similar instruments. The fair value of foreign currency forward contracts is determined by comparing the contract rate to a published forward price of the underlying currency, which is based on market rates for comparable transactions. The fair value is then adjusted for the Company’s own credit risk or counterparty credit risk, as appropriate. This adjustment is calculated based on the default probability of the banking counterparty or the Company and is obtained from active credit default swap markets.

The Company reviews the fair value hierarchy classification for financial assets and liabilities at the end of each quarter. Changes in significant unobservable valuation inputs may trigger reclassification of financial assets and liabilities between fair value hierarchy levels. As of March 31, 2012, credit risk fair value adjustments constituted more than 15% of the unadjusted fair value of derivative instruments. In such circumstances the Company’s policy is to categorize instruments with such unobservable inputs as Level 3 of the fair value hierarchy. Transfers into and out of Level 3 of the fair value hierarchy are recognized at the end of each quarter.

Presented below is a summary of the fair value of the Company’s derivative contracts, none of which have been designated as hedging instruments, recorded on the consolidated condensed balance sheets at fair value.

		Fair Value Asset (Liability)					Fair Value Asset (Liability)
(in $ millions)	Balance Sheet Location	March 31, 2012		December 31, 2011		Balance Sheet Location	March 31, 2012			December 31, 2011
Interest rate swaps	Other current assets		—		—	Accrued expenses and other current liabilities		(4	)		(4	)
Interest rate swaps	Other non-current assets		—		—	Other non-current liabilities		(1	)		(2	)
Foreign currency forward contracts	Other current assets		7		2	Accrued expenses and other current liabilities		(7	)		(33	)
Total fair value of derivative assets (liabilities)			7		2			(12)			(39	)

As of March 31, 2012, the Company had an aggregate outstanding notional $250 million of interest rate swaps, and $770 million of foreign currency forward contracts. All derivative contracts cover transactions for periods that do not exceed two years.

The following table provides a reconciliation of the movement in the carrying amount of derivative financial instruments, net liability position, during the three months ended March 31, 2012.

(in $ millions)
Balance as of January 1, 2012	(37	)
Total gains for the period included in net loss	15
Settlement of foreign exchange derivative contracts related to euro denominated debt	16
Settlement of interest rate derivative contracts	1
Balance as of March 31, 2012	(5	)

The significant unobservable inputs used to fair value the Company’s derivative financial instruments are probability of default of approximately 31% and a recovery rate of 20% applied to the Company’s credit default swap adjustments. A 10% change in the significant unobservable inputs will not have a material impact on the fair value of the derivative financial instruments as of March 31, 2012.

Changes in the fair value of derivatives not designated as hedging instruments are recognized in earnings in the Company’s consolidated condensed statements of operations.

The table below presents the impact derivatives not designated as hedges had on income (loss) during that period.

		Amount of Gain (Loss) Recorded into Income (Loss)
	Location of Gain (Loss) Recorded in Income (Loss)	Three Months Ended March 31,
(in $ millions)		2012		2011
Derivatives designated as hedging instruments:
Interest rate swaps	Interest expense, net		—		(2	)
Derivatives not designated as hedging instruments:
Interest rate swaps	Interest expense, net		1		(8	)
Foreign exchange impact of cross currency swaps	Selling, general and administrative		—		11
Foreign exchange forward contracts	Selling, general and administrative		14		45
			15		46

Fair Value Disclosures for All Financial Instruments

The carrying amounts of cash and cash equivalents, cash held as collateral, accounts receivable, other current assets, accounts payable and accrued expenses and other current liabilities approximate fair value due to the short-term maturities of these assets and liabilities.

The fair values of the Company’s other financial instruments are as follows:

	March 31, 2012						December 31, 2011
(in $ millions)	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Asset (liability)
Investment in Orbitz Worldwide		72			149			77			184
Derivative assets (see above)		7			7			2			2
Derivative liabilities (see above)		(12	)		(12	)		(39	)		(39	)
Total debt		(3,415	)		(2,488	)		(3,407	)		(2,353	)

The fair value of the Company’s investment in Orbitz Worldwide, which is categorized within Level 1 of the fair value hierarchy, has been determined based on quoted prices in active markets.

The fair value of the Company’s total debt, which is categorized within Level 2 of the fair value hierarchy, has been determined by calculating the fair value of the second priority secured notes, senior notes and senior subordinated notes based on quoted prices in active markets for identical debt instruments and by calculating amounts outstanding under the senior secured credit agreement based on market observable inputs.