FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2016

FINANCIAL INSTRUMENTS

FINANCIAL INSTRUMENTS

9. financial instruments

Interest Rate Risk Management

On May 2, 2016, certain of the Company’s wholly-owned subsidiaries entered into six pay-fixed, receive-variable interest rate swap agreements having amortizing notional amounts to hedge a portion of the London Interbank Offered Rate (“LIBOR”) floating rate interest expense on the Company’s credit facilities as discussed in Note 14, LONG TERM DEBT. As described below, In December 2016, the Company amended one of these two interest rate swap agreements and simultaneously terminated and re-entered into the other such swap agreement. Under each interest rate swap transaction, a subsidiary of the Company makes a fixed payment each period in an amount equal to the fixed interest rate for such transaction multiplied by the relevant notional amount for that monthly period in exchange for a payment from the respective swap counterparty in an amount equal to a variable interest rate based on the applicable LIBOR rate for that period multiplied by the same notional amount. The applicable period, LIBOR rate and notional amounts are identified in the table below.

Two of the swaps effectively fix the interest rate on approximately 50% of the aggregate variable interest rate borrowings expected to be outstanding under the Refinancing Facility through September 3, 2020, and three of the swaps, which have a mandatory termination date of September 30, 2020, effectively fix the interest rate on approximately 80% of the aggregate variable interest rate borrowings expected to be outstanding under the Korean Export Credit Facility through September 30, 2020, and thereafter on approximately 5% of those variable interest rate borrowings through February 20, 2029. The remaining swap, which has a mandatory termination date of March 21, 2022, effectively fixes the interest rate on approximately 100% of the aggregate variable interest rate borrowings expected to be outstanding under the Amended Sinosure Credit Facility through March 21, 2022, and thereafter on approximately 5% of those variable interest rate borrowings through May 6, 2028 (excluding the incremental increase in available borrowings pursuant to the June 2016 amendment to the Sinosure Credit Facility). When a swap automatically terminates, the Company may elect to replace the swap to hedge the remaining borrowings outstanding under the applicable credit facility as of the swap termination date. Under certain limited circumstances, the relevant subsidiary of the Company has the right to transfer the related interest rate swap(s) to a qualifying third party, which would have the effect of terminating the subsidiary’s obligations under those interest rate swaps and/or to cause the novation of the related interest rate swap(s) to a third party derivatives dealer.

The Company’s objective is to limit the variability of cash flows associated with changes in LIBOR interest rate payments due on its credit facilities by using the interest rate swaps to offset the future variable rate interest payments made by the Company. The Company elected to apply hedge accounting and designated the swaps as cash flow hedges. The Company uses regression analysis to test if the swaps are expected to be highly effective (defined as the swaps’ offsetting at least 80% and not more than 125% of the hedged interest payments) on both a prospective and retrospective basis. The effective portion of the changes in fair value of the swap agreements, including adjustments for non-performance risk, which are designated and qualify as cash flow hedges, are classified in accumulated other comprehensive income/loss. These amounts are reclassified to interest expense when the hedged interest payments are incurred.

In December 2016, the principal and interest repayment dates under the Refinancing Facility were modified and the payment dates on the two related swap agreements were similarly modified. The revised swaps were dedesignated and were simultaneously redesignated with no interruption in hedge accounting. The effective gain on the swaps was recorded in accumulated other comprehensive income/loss and is reclassified to interest expense as the hedged interest expense is incurred. The ineffective portion of the gain was recorded in earnings. All future effective changes in fair value will continue to be recognized in other accumulated other comprehensive income/loss and all ineffective changes will continue to be recognized in earnings.

Amounts in accumulated other comprehensive loss expected to be reclassified into earnings in the next 12 months are $2.1 million. The ineffective portion, if any, of the change in fair value of the Company’s interest rate swap agreements is required to be recognized in earnings. As of December 31, 2016, the Company’s interest rate swap agreements were highly effective; during the year ended December 2016, hedge ineffectiveness of $0.7 million was recognized in earnings (included in Other income (expense), net in the consolidated statement of operation).

At December 31, 2016, the Company was a party to the following interest rate swaps, which are intended to be cash flow hedges that effectively fix the interest rates for a portion of the Refinancing Facility, the Korean Export Credit Facility and the Amended Sinosure Credit Facility (dollars in thousands): 

	December 31, 2016
	Notional		Effective		Maturity		Fair Value		Fixed		Floating
Hedged Credit Facility	Amount		Date		Date (2)		Hierarchy		Interest Rate		Interest Rate
Refinancing Facility	$	182,610		12/22/2016		9/3/2020		Level 2		1.0051%	1 mo. LIBOR
Refinancing Facility		45,653		12/30/2016		9/3/2020		Level 2		1.0016%	1 mo. LIBOR
Korean Export Credit Facility (1)		479,773		6/30/2016		9/30/2020		Level 2		1.2970%	3 mo. LIBOR
Korean Export Credit Facility (1)		89,957		6/30/2016		9/30/2020		Level 2		1.3370%	3 mo. LIBOR
Korean Export Credit Facility (1)		29,986		6/30/2016		9/30/2020		Level 2		1.3075%	3 mo. LIBOR
Sinosure Credit Facility		233,452		6/21/2016		3/21/2022		Level 2		1.4100%	3 mo. LIBOR

(1) The initial aggregate notional amount of $333.9 million under the three interest rate swaps is scheduled to increase up to a maximum aggregate notional amount of $680.8 million in order to effectively fix the interest rate on the target percentage of expected borrowings, since the loans under the Korean Export Credit Facility were not fully drawn as of the effective date of the interest rate swap transaction.

(2) As described above, after this date, these swaps effectively fix the interest rate on approximately 5% of the aggregate variable interest rate borrowings of the applicable credit facility through February 20, 2029 in the case of the Korean Export Credit Facility and May 6, 2028 in the case of the Sinosure Credit Facility.

The tables below provide quantitative information about the impact of derivatives on the Company’s balance sheet and statement of operations (dollars in thousands):

		December 31, 2016				December 31, 2015
	Balance Sheet	Fair Value of Derivatives				Fair Value of Derivatives
	Location	Asset		Liability		Asset		Liability
Derivatives designated as hedging instruments
Interest rate swap contracts - non-current	Non-current assets	$	19,585	$	—	$	—	$	—
Interest rate swap contracts - current	Current liabilities		(1,552)		—		—		—
Total derivatives designated as hedging instruments		$	18,033	$	—	$	—	$	—

	Offsetting of Derivative Assets
	December 31, 2016
							Gross Amounts Not Offset
	Gross		Gross		Net Amounts		in the Balance Sheet
	Amounts of		Amounts		of Assets				Cash
	Recognized		Offset in the		presented in the		Financial		Collateral
	Assets		Balance Sheet		Balance Sheet		Instruments		Pledged		Net Amount
Counterparty 1	$	15,577	$	1,314	$	16,891	$	(1,314)	$	—	$	15,577
Counterparty 2		975		80		1,055		(80)		—		975
Counterparty 3		1,481		158		1,639		(158)		—		1,481
Total	$	18,033	$	1,552	$	19,585	$	(1,552)	$	—	$	18,033
	Offsetting of Derivative Liabilities
	December 31, 2016
							Gross Amounts Not Offset
	Gross		Gross		Net Amounts		in the Balance Sheet
	Amounts of		Amounts		of Liabilities				Cash
	Recognized		Offset in the		presented in the		Financial		Collateral
	Liabilities		Balance Sheet		Balance Sheet		Instruments		Pledged		Net Amount
Counterparty 1	$	—	$	(1,314)	$	(1,314)	$	1,314	$	—	$	—
Counterparty 2		—		(80)		(80)		80		—		—
Counterparty 3		—		(158)		(158)		158		—		—
Total	$	—	$	(1,552)	$	(1,552)	$	1,552	$	—	$	—

The following table provides the effect of derivatives on the statements of operations for the year ended December 31, 2016 (dollars in thousands):

	Location of Gain or
	(Loss) Reclassified	Location of Gain
Derivatives in Cash Flow	from AOCI to	(Loss) Recognized
Hedging Relationships	Income	on Derivatives	2016		2015
Interest rate swap contracts (Effective Portion)
Amount of gain / (loss) recognized in OCI on derivatives	Interest Expense, net		$	14,642	$	—
Amount of gain / (loss) reclassified from AOCI into income on derivatives	Interest Expense, net			(2,692)		—
Interest rate swap contracts (Ineffective Portion)
Amount of gain / (loss) recognized in income on derivatives		Other expense, net	$	696		—