11. 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 10, LONG TERM DEBT. 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. As described below, in December 2016, the Company modified two interest rate swap agreements hedging the Refinancing Facility.

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 the revised swaps 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.

On April 10, 2017, the Company modified all of its interest rate swaps agreements. The modifications included changes to the notional amounts and maturity dates of, and increases in the fixed rates payable under, the interest rate swap transactions. See Note 17, SUBSEQUENT EVENTS, for more details.

Amounts in Accumulated other comprehensive loss expected to be reclassified into earnings in the next 12 months are $0.2 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 March 31, 2017, the Company’s interest rate swap agreements were highly effective; during the three months ended March 31, 2017, hedge ineffectiveness of $0.7 million was recognized in earnings (included in Other income (expense), net in the consolidated statement of operation).

At March 31, 2017, 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):

March 31, 2017

Notional

Effective

Maturity

Fair Value

Fixed

Floating

Hedged Credit Facility

Amount

Date

Date (2)

Hierarchy

Interest Rate

Refinancing Facility

171,197

12/22/2016

9/3/2020

Level 2

1.0051%

1 mo. LIBOR

Refinancing Facility

42,799

12/30/2016

9/3/2020

Level 2

1.0016%

1 mo. LIBOR

Korean Export Credit Facility (1)

544,670

6/30/2016

9/30/2020

Level 2

1.2970%

3 mo. LIBOR

Korean Export Credit Facility (1)

102,126

6/30/2016

9/30/2020

Level 2

1.3370%

3 mo. LIBOR

Korean Export Credit Facility (1)

34,042

6/30/2016

9/30/2020

Level 2

1.3075%

3 mo. LIBOR

Sinosure Credit Facility

229,355

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 has increased up to the maximum aggregate notional amount of $680.8 million in order to effectively fix the interest rate on the target percentage of expected borrowings, since additional loans under the Korean Export Credit Facility were fully drawn as expected. The swap notional will amortize down hereafter.

(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 Amended 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):


		March 31, 2017				December 31, 2016
	Balance Sheet	Fair Value of Derivatives				Fair Value of Derivatives
	Location	Asset		Liability		Asset		Liability
Derivatives designated as hedging instruments

Interest rate swap contracts - current	Current assets	$	674	$		$	—	$	—
Interest rate swap contracts - non-current	Non-current assets		19,168		—		19,585		—
Interest rate swap contracts - current	Current liabilities		(125)		—		(1,552)		—
Total derivatives designated as hedging instruments		$	19,717	$	—	$	18,033	$	—


	Offsetting of Derivative Assets
	March 31, 2017
							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	$	16,970	$	125	$	17,095	$	(125)	$	—	$	16,970
Counterparty 2		1,117		—		1,117		—		—		1,117
Counterparty 3		1,630		—		1,630		—		—		1,630
Total	$	19,717	$	125	$	19,842	$	(125)	$	—	$	19,717


	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
	March 31, 2017
							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	$	—	$	(125)	$	(125)	$	125	$	—	$	—
Counterparty 2		—		—		—		—		—		—
Counterparty 3		—		—		—		—		—		—
Total	$	—	$	(125)	$	(125)	$	125	$	—	$	—


	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 period ended March 31, 2017 (dollars in thousands):


	Location of Gain or
	(Loss) Reclassified	Location of Gain	Three Months Ended
Derivatives in Cash Flow	from AOCI to	(Loss) Recognized	March 31,
Hedging Relationships	Income	on Derivatives	2017		2016
Interest rate swap contracts (Effective Portion)
Amount of gain / (loss) recognized in OCI on derivatives	Interest Expense, net		$	196	$	—
Amount of gain / (loss) reclassified from AOCI into income on derivatives	Interest Expense, net			(827)		—

Interest rate swap contracts (Ineffective Portion)
Amount of gain / (loss) recognized in income on derivatives		Other expense, net	$	683		—