DERIVATIVE INSTRUMENTS

3 Months Ended

Mar. 31, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE INSTRUMENTS

DERIVATIVE INSTRUMENTS

The Company enters into derivative transactions in order to hedge its interest rate risk exposure to the effects of interest rate changes. Additionally, the Company enters into derivative transactions in the course of its portfolio management activities. The counterparties to the Company’s derivative agreements are major financial institutions with which the Company and its affiliates may also have other financial relationships. In the event of nonperformance by the counterparties, the Company is potentially exposed to losses. The counterparties to the Company’s derivative agreements have investment grade ratings and, as a result, the Company does not anticipate that any of the counterparties will fail to fulfill their obligations.

The table below summarizes the aggregate notional amount and estimated net fair value of the derivative instruments as of March 31, 2015 and December 31, 2014 (amounts in thousands):

	As of March 31, 2015						As of December 31, 2014
	Notional			Estimated Fair Value			Notional			Estimated Fair Value
Free-Standing Derivatives:
Interest rate swaps	$	332,667		$	(53,801	)	$	426,000		(54,071		)
Foreign exchange forward contracts	(446,713		)	66,427			(442,181		)	27,428
Common stock warrants	—			521			—			—
Total rate of return swaps	—			(151		)	—			(130		)
Options	—			4,309			—			5,212
Total				$	17,305					$	(21,561	)

Cash Flow Hedges

Interest Rate Swaps

As described above in Note 2 to these condensed consolidated financial statements, in connection with the Merger Transaction and as of the Effective Date, the Company discontinued hedge accounting for its cash flow hedges and records changes in the estimated fair value of the derivative instruments in the condensed consolidated statements of operations. Accordingly, disclosures related to cash flow hedges pertain to the Predecessor Company.

The Company uses interest rate swaps to hedge a portion of the interest rate risk associated with its CLOs as well as certain of its floating rate junior subordinated notes. The Predecessor Company designated these interest rate swaps as cash flow hedges and as of March 31, 2014, had interest rate swaps with a notional amount totaling $469.3 million. Changes in the estimated fair value of the interest rate swaps were recorded through accumulated other comprehensive income (loss), with gains or losses representing hedge ineffectiveness, if any, recognized in earnings during the reporting period.

The following table presents the net gains (losses) recognized in other comprehensive income (loss) related to derivatives in cash flow hedging relationships for the three months ended March 31, 2014 (amounts in thousands):

	For the three months ended March 31, 2014
Net gains (losses) recognized in accumulated other comprehensive income (loss) on cash flow hedges	$	(3,831	)

For all hedges where hedge accounting was applied, effectiveness testing and other procedures to ensure the ongoing validity of the hedges were performed at least quarterly. During the three months ended March 31, 2014, the Company did not recognize any ineffectiveness in income on the condensed consolidated statements of operations from its cash flow hedges.

As of March 31, 2015 and December 31, 2014, the Successor Company had interest rate swaps with a notional amount of $332.7 million and $426.0 million, respectively, which were classified as free-standing derivatives, rather than cash flow hedges. 

Free-Standing Derivatives

Free-standing derivatives are derivatives that the Company has entered into in conjunction with its investment and risk management activities, but for which the Company has not designated the derivative contract as a hedging instrument for accounting purposes. Such derivative contracts may include commodity derivatives, credit default swaps (“CDS”) and foreign exchange contracts and options. Free-standing derivatives also include investment financing arrangements (total rate of return swaps) whereby the Company receives the sum of all interest, fees and any positive change in fair value amounts from a reference asset with a specified notional amount and pays interest on such notional amount plus any negative change in fair value amounts from such reference asset.

Gains and losses on free-standing derivatives are reported in net realized and unrealized gain (loss) on derivatives and foreign exchange in the condensed consolidated statements of operations. Unrealized gains (losses) represent the change in fair value of the derivative instruments and are noncash items.

Credit Default Swaps

A CDS is a contract in which the contract buyer pays, in the case of a short position, or receives, in the case of long position, a periodic premium until the contract expires or a credit event occurs. In return for this premium, the contract seller receives a payment from or makes a payment to the buyer if there is a credit default or other specified credit event with respect to the issuer (also known as the reference entity) of the underlying credit instrument referenced in the CDS. Typical credit events include bankruptcy, dissolution or insolvency of the reference entity, failure to pay and restructuring of the obligations of the reference entity.

The Company sells or purchases protection to replicate fixed income securities and to complement the spot market when cash securities of the referenced entity of a particular maturity are not available or when the derivative alternative is less expensive compared to other purchasing alternatives. In addition, the Company may purchase protection to hedge economic exposure to declines in value of certain credit positions. The Company purchases its protection from banks and broker dealers, other financial institutions and other counterparties.

Foreign Exchange Derivatives

The Company holds certain positions that are denominated in a foreign currency, whereby movements in foreign currency exchange rates may impact earnings if the United States dollar significantly strengthens or weakens against foreign currencies. In an effort to minimize the effects of these fluctuations on earnings, the Company will from time to time enter into foreign exchange options or foreign exchange forward contracts related to the assets denominated in a foreign currency. As of March 31, 2015 and December 31, 2014, the net contractual notional balance of our foreign exchange options and forward contract liabilities totaled $446.7 million and $442.2 million, respectively, the majority of which related to certain of our foreign currency denominated assets.

Free-Standing Derivatives Income (Loss)

The following table presents the amounts recorded in net realized and unrealized gain (loss) on derivatives and foreign exchange on the condensed consolidated statements of operations for the three months ended March 31, 2015 and 2014(amounts in thousands):

	Successor Company									Predecessor Company
	Three months ended March 31, 2015									Three months ended March 31, 2014
	Realized gains (losses)			Unrealized gains (losses)			Total			Realized gains (losses)			Unrealized gains (losses)			Total
Interest rate swaps	$	(5,297	)	$	(244	)	$	(5,541	)	$	—		$	—		$	—
Commodity swaps	—			—			—			(1,914		)	(3,667		)	(5,581		)
Credit default swaps(1)	—			—			—			(2,167		)	1,986			(181		)
Foreign exchange forward contracts and options(2)	15			(594		)	(579		)	(450		)	68			(382		)
Common stock warrants	—			(1,891		)	(1,891		)	—			14			14
Total rate of return swaps	(165		)	(21		)	(186		)	(1,943		)	114			(1,829		)
Options	—			(903		)	(903		)	—			(411		)	(411		)
Net realized and unrealized gains (losses)	$	(5,447	)	$	(3,653	)	$	(9,100	)	$	(6,474	)	$	(1,896	)	$	(8,370	)

(1) Includes related income and expense on the derivatives.

(2) Net of foreign exchange remeasurement gain or loss on foreign denominated assets.

A master netting arrangement may allow each counterparty to net settle amounts owed between the Company and the counterparty as a result of multiple, separate derivative transactions. The Company has International Swaps and Derivatives Association ("ISDA") agreements or similar agreements with certain financial institutions which contain netting provisions. While these derivative instruments are eligible to be offset in accordance with applicable accounting guidance, the Company has elected to present derivative assets and liabilities on a gross basis in its condensed consolidated balance sheets. As of March 31, 2015, if the Company had elected to offset the asset and liability balances of its derivative instruments, the net asset positions would total the following with its respective financial institution counterparties: (i) $3.0 million, net of $26.6 million collateral posted, (ii) $1.1 million, net of $11.5 million collateral posted and (iii) $7.0 million, net of $16.7 million collateral held.