Financial Instruments

12 Months Ended

Dec. 31, 2012

Financial Instruments [Abstract]

Financial Instruments

12.    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 December 31, 2012, the Company had a net asset position of $11 million related to derivative 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. From time to time, the Company uses interest rate swap contracts, which are derivative instruments, to economically hedge the exposure to fluctuations in the interest rate risk by creating an appropriate mix of fixed and floating rate debt. These derivative instruments are not designated as hedging instruments and changes in the fair value of these derivatives are recorded in consolidated statement of operations when they occur. The primary interest rate exposure as of December 31, 2012 was to interest rate fluctuations in the United States and Europe, specifically the impact of USLIBOR and EURIBOR interest rates on variable rate borrowings. During the year ended December 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 and cross currency swaps as accounting hedges; therefore, the fluctuations in the value of these contracts are recorded within the Company’s consolidated statements of operations, which largely offset the impact of the changes in the value of the underlying risk they are intended to economically hedge.

Foreign Currency Risk

The Company uses foreign currency derivative contracts, including forward contracts and currency options, 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 British pound, Euro and Australian dollar). The Company does not designate these foreign currency derivative contracts as accounting hedges; therefore, the fluctuations in the value of these foreign currency derivative contracts are recorded within the Company’s consolidated 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. During the year ended December 31, 2010, certain contracts were designated as hedges for accounting purposes.

Credit Risk and Exposure

The Company is exposed to counterparty credit risk in the event of non-performance by counterparties to various agreements and sales transactions. The Company manages such risk by evaluating the financial position and creditworthiness of such counterparties and by requiring collateral where financing is provided. The Company mitigates counterparty credit risk associated with its derivative contracts by monitoring the amounts at risk with each counterparty to such contracts, periodically evaluating counterparty creditworthiness and financial position, and where possible, dispersing its risk among multiple counterparties. As of December 31, 2012, there were no significant concentrations of counterparty credit risk with any individual counterparty or group of counterparties for derivative contracts.

Fair Value Disclosures for Derivative Instruments

The Company’s financial assets and liabilities recorded at fair value consist primarily of derivative instruments. These amounts have been categorized based upon a fair value hierarchy and were all are categorized as Level 3—Significant Unobservable Inputs as of December 31, 2012 and December 31, 2011. See Note 2—Summary of Significant Accounting Policies, for a discussion of the Company’s policies regarding this hierarchy.

The fair value of interest rate and cross currency swap derivative 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 of foreign currency option contracts is based on valuations provided by the financial institutions based on market observable data. These fair values are 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 December 31, 2012, credit risk fair value adjustments constituted less than 15% of the unadjusted fair value of derivative instruments. In instances where Credit Valuation Agreement (CVA) comprises 15% or more of the unadjusted fair value of the derivative instrument for two consecutive quarters the Company’s policy is to categorize the derivative 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 when such categorization takes place.

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 balance sheets at fair value.

		Fair Value Asset (Liability)					Fair Value Asset (Liability)
(in $ millions)	Balance Sheet Location	December 31, 2012		December 31, 2011		Balance Sheet Location	December 31, 2012			December 31, 2011
Interest rate swaps	Other current assets		—		—	Accrued expenses and other current liabilities		(3	)		(4	)
Interest rate swaps			—		—	Other non-current liabilities		—			(2	)
Foreign currency contracts	Other current assets		10		2	Accrued expenses and other current liabilities		(1	)		(33	)
Foreign currency contracts	Other non-current assets		5		—	Other non-current liabilities		—			—
Total fair value of derivative assets (liabilities)			15		2			(4	)		(39	)

As of December 31, 2012, the Company had an aggregate outstanding notional $250 million of interest rate swaps, $210 million of foreign currency option contracts, and $439 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 net carrying amount of derivative financial instruments during the year ended December 31, 2012.

(in $ millions)
Net derivative liability as of January 1, 2012	(37	)
Total losses for the period included in net loss	(4	)
Net payment on settlement of foreign currency derivative contracts	42
Settlement of interest rate derivative contracts	3
Termination of foreign currency derivative contracts (settlement pending)	7
Net derivative asset as of December 31, 2012	11

The Company paid $51 million and received $9 million in cash on settlement of foreign currency derivative contracts during the year ended December 31, 2012. The Company received $34 million in cash on settlement of foreign currency derivative contracts during the year ended December 31, 2011. The Company paid $77 million and received $16 million in cash on settlement of foreign currency derivative contracts during the year ended December 31, 2010.

The significant unobservable inputs used to fair value the Company’s derivative financial instruments have a probability of default of approximately 12%, and a recovery rate of 20% has been 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 December 31, 2012.

The table below presents the impact that changes in fair values of derivatives designated as hedges had on accumulated other comprehensive income (loss) and income (loss) during the year and the impact derivatives not designated as hedges had on income (loss) during that year.

	Amount of Gain (Loss) Recognized in Other Comprehensive Income (Loss)								Amount of Gain (Loss) Recorded into Income (Loss)
	Year Ended December 31,							Location of Gain (Loss) Recorded in Income (Loss)	Year Ended December 31,
(in $ millions)	2012		2011		2010				2012			2011			2010
Derivatives designated as hedging instruments:
Interest rate swaps		—		—		(4	)	Interest expense, net		—			(9	)		(10	)
Foreign exchange impact of cross currency swaps		—		—		(15	)	Selling, general and administrative		—			—			(15	)
Foreign currency contracts		—		—		(9	)	Selling, general and administrative		—			—			(12	)
Derivatives not designated as hedging instruments:
Interest rate swaps								Interest expense, net		(4	)		(4	)		(22	)
Foreign exchange impact of cross currency swaps								Selling, general and administrative		—			14			—
Foreign currency contracts								Selling, general and administrative		—			(16	)		(50	)
										(4	)		(15	)		(109	)

The table above includes (i) unrealized gains on interest rate swaps held as of December 31, 2012, amounting to $1 million for the year ended December 31, 2012, and (ii) unrealized loss on foreign currency contracts of $3 million for the year ended December 31, 2012.

During 2010, the Company de-designated as hedges certain of its derivative contracts. The total loss in relation to these contracts of $9 million as of December 31, 2010 and included within accumulated other comprehensive income (loss) was recorded in income (loss) in the Company’s consolidated statement of operations over the year through December 31, 2011, in line with the hedged transactions affecting earnings. The total amount of loss recorded on these contracts in the consolidated statements of operations during the years ended December 31, 2012, 2011 and 2010 was nil, $9 million and $10 million, respectively.

Fair Value Disclosures for All Financial Instruments

The carrying amounts of cash and cash equivalents, 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:

	December 31, 2012						December 31, 2011
(in $ millions)	Carrying Amount			Fair Value			Carrying Amount			Fair Value
Asset (liability)
Investment in Orbitz Worldwide		—			133			77			184
Derivative assets (see above)		15			15			2			2
Derivative liabilities (see above)		(4	)		(4	)		(39	)		(39	)
Total debt		(3,430	)		(2,899	)		(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 using significant inputs which were observable either directly or indirectly.