Derivative Instruments And Hedging Activities

6 Months Ended

Jun. 30, 2011

Derivative Instruments And Hedging Activities

Derivative Instruments And Hedging Activities

5. Derivative Instruments and Hedging Activities

The Company is exposed to interest rate risk associated with fluctuations in the interest rates on its floating-rate debt. In order to manage the risk associated with changes in interest rates on borrowings under the Term Loan, the Company has entered into interest rate derivative agreements to hedge a portion of the cash flows associated with the Term Loan.

The Company's objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate fluctuations. To accomplish these objectives, the Company primarily uses interest rate caps and swaps as part of its interest rate risk management strategy. Interest rate caps involve the receipt of floating-rate amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. Interest rate swaps involve the receipt of floating-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

Interest Rate Cap Agreements

In April 2010, the Company entered into four interest rate cap agreements with a combined $1,100.0 million notional amount. Under these agreements, the Company made premium payments totaling $5.9 million to the counterparties in exchange for the right to receive payments from them of the amount, if any, by which three-month LIBOR exceeds 3.5% during the agreement period. The cap agreements are effective from January 14, 2011 through January 14, 2013.

During the first six months of 2011, the Company entered into three interest rate cap agreements with a combined $375.0 million notional amount. Under the agreements, the Company made premium payments totaling $3.2 million to the counterparties in exchange for the right to receive payments from them of the amount, if any, by which three-month LIBOR exceeds 3.5% during the agreement period. The cap agreements are effective from January 14, 2013 through January 14, 2015.

These cap agreements have not been designated as cash flow hedges of interest rate risk for accounting purposes. Instead, the interest rate cap agreements are recorded at fair value on the Company's consolidated balance sheet each period, with changes in fair value recorded directly to interest expense, net on the Company's consolidated statements of operations.

On July 27, 2011, the Company entered into an additional interest rate cap agreement with a notional amount of $125.0 million, which is effective from January 14, 2013 through January 14, 2015. The Company made a premium payment of $0.6 million to the counterparty in exchange for the right to receive payments of the amount, if any, by which three-month LIBOR exceeds 3.5% during the agreement period.

Interest Rate Swap Agreements

On January 14, 2011, the Company's two existing interest rate swap agreements terminated. The interest rate swaps hedged a portion of the cash flows associated with the Term Loan. On October 24, 2007, the Company entered into the first swap agreement with a notional amount of $1,500.0 million, and later amended this swap agreement effective July 14, 2009. On November 27, 2007, the Company entered into the second interest rate swap agreement with a notional amount of $700.0 million, which was reduced to $500.0 million as of January 14, 2010.

For the Company's interest rate swaps designated as cash flow hedges of interest rate risk for accounting purposes, the effective portion of the changes in fair value of the swaps was initially recorded as a component of accumulated other comprehensive income (loss) ("AOCI") in the Company's consolidated balance sheets and subsequently reclassified into interest expense, net in the Company's consolidated statements of operations in the period that the hedged forecasted transaction affected earnings. The ineffective portion of the change in fair value of the swaps was recognized directly in earnings in interest expense, net. For the Company's interest rate swap not designated as a cash flow hedge of interest rate risk, changes in fair value of the swap were recorded directly to interest expense, net in the Company's consolidated statements of operations.

Both of the Company's interest rate swaps were initially designated as cash flow hedges. However, as a result of the amendment to the $1,500.0 million interest rate swap agreement, the Company prospectively discontinued the hedge accounting on the original interest rate swap agreement. Simultaneously, the Company designated the amended interest rate swap agreement as a cash flow hedge. On December 17, 2010, the Company discontinued the hedge accounting on the amended $1,500.0 million interest rate swap agreement as a result of the Term Loan amendment as described in Note 4. The Company continued to report the net loss related to the discontinued cash flow hedges in AOCI, which was reclassified into earnings on a straight-line basis through January 14, 2011.

The amount of the loss reclassified into earnings during the three and six months ended June 30, 2010 was $9.3 million and $18.6 million, respectively. The Company did not reclassify any losses into earnings during the three months ended June 30, 2011. The amount of loss reclassified into earnings during the six months ended June 30, 2011 was $2.1 million.

The Company utilized the hypothetical derivative method to measure hedge ineffectiveness each period for interest rate swaps designated as cash flow hedges. For the three and six months ended June 30, 2010, the Company recognized $9.4 million and $44.6 million, respectively, of non-cash gains due to hedge ineffectiveness on the amended $1,500.0 million swap. The Company did not recognize any gains or losses due to hedge ineffectiveness during the three or six months ended June 30, 2011.

The fair values of the interest rate cap and swap agreements are estimated as described in Note 6 and reflected as assets or liabilities on the balance sheet. At June 30, 2011 and December 31, 2010, the fair values of the Company's interest rate derivatives were as follows:

(in millions)	Balance Sheet Location	Derivative Assets				Derivative Liabilities
		June 30, 2011		December 31, 2010		June 30, 2011		December 31, 2010
Derivatives not designated as hedging instruments
Interest rate cap agreements	Fair value of interest rate cap agreements	$	2.4	$	1.2	$	—	$	—
Interest rate swap agreements	Fair value of interest rate swap agreements	$	—	$	—	$	—	$	2.1
Derivatives designated as hedging instruments
Interest rate swap agreements	Fair value of interest rate swap agreements	$	—	$	—	$	—	$	0.7

The effect of derivative instruments on the consolidated statements of operations for the three months ended June 30, 2011 and 2010 was as follows:

Derivatives not designated as hedging instruments

(in millions)	Amount of Loss Recognized in Interest Expense, net
	Three Months Ended June 30,
	2011			2010
Interest rate cap agreements	$	(1.8	)	$	(3.5	)
Total	$	(1.8	)	$	(3.5	)

Derivatives designated as hedging instruments

(in millions)	Amount of Loss Recognized in OCI (Effective Portion)					Amount of Loss Reclassified from AOCI into Interest Expense,  net (Effective Portion)					Amount of Gain (Loss) Recognized in Interest Expense, net (Ineffective Portion)
	Three Months Ended June 30,					Three Months Ended June 30,					Three Months Ended June 30,
	2011		2010			2011		2010			2011		2010
Interest rate swap agreements	$	—	$	(0.7	)	$	—	$	(19.1	)	$	—	$	—
Total	$	—	$	(0.7	)	$	—	$	(19.1	)	$	—	$	—

The effect of derivative instruments on the consolidated statements of operations for the six months ended June 30, 2011 and 2010 was as follows:

Derivatives not designated as hedging instruments

(in millions)	Amount of Loss Recognized in Interest Expense, net
	Six Months Ended June 30,
	2011			2010
Interest rate cap agreements	$	(2.0	)	$	(3.5	)
Total	$	(2.0	)	$	(3.5	)

Derivatives designated as hedging instruments

(in millions)	Amount of Loss Recognized in OCI (Effective Portion)					Amount of Loss Reclassified from AOCI into Interest Expense,  net (Effective Portion)						Amount of Gain Recognized in Interest Expense, net (Ineffective Portion)
	Six Months Ended June 30,					Six Months Ended June 30,						Six Months Ended June 30,
	2011		2010			2011			2010			2011		2010
Interest rate swap agreements	$	—	$	(33.1	)	$	(2.8	)(1)	$	(38.6	)	$	—	$	25.9
Total	$	—	$	(33.1	)	$	(2.8	)	$	(38.6	)	$	—	$	25.9

⁽¹⁾ The Company reclassified realized losses of $2.8 million from AOCI to net loss, or $1.9 million net of tax as reflected in the consolidated statement of shareholders' deficit.

There was no balance remaining in AOCI related to the Company's interest rate swap agreements as of June 30, 2011. The Company had no derivative instruments with credit-risk-related contingent features that were in a liability position as of June 30, 2011.