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 transactions 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. In December 2016, the Company modified the two interest rate swap transactions hedging the Refinancing Facility to align the payment dates under those interest rate swap transactions to the principal and interest repayment dates under the Refinancing Facility. On April 10, 2017, the Company further modified those two interest rate swap transactions and additionally modified the remaining four interest rate swap transactions. These modifications included changes to the notional amounts and maturity dates of, and increases in the fixed rates payable under, the interest rate swap transactions. The applicable period, LIBOR rate and notional amounts for each interest rate swap transaction is identified in the table below.

As modified, two of the swaps effectively fix the interest rate on approximately 35% of the aggregate variable interest rate borrowings expected to be outstanding under the Refinancing Facility through September 3, 2020, three of the swaps effectively fix the interest rate on approximately 74% of the aggregate variable interest rate borrowings expected to be outstanding under the Korean Export Credit Facility through September 30, 2020, and the remaining swap 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 (excluding the incremental increase in available borrowings pursuant to the June 2016 amendment to the Sinosure Credit Facility). 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 prior to the relevant termination date for that interest rate swap. Otherwise, upon the termination of an interest rate swap transaction on the relevant termination date, 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.

The Company’s objective in entering into the interest rate swap transactions 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 has 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 exposure) on both a prospective and retrospective basis. The effective portion of the changes in fair value of the swaps, 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, in connection with the modification of the interest rate swap transactions hedging the Refinancing Facility, 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.

During the second quarter of 2017 and in connection with the modifications to the interest rate swap transactions on April 10, 2017 described above, the Company received payments totaling $18.2 million from the swap counterparties.

Amounts in Accumulated other comprehensive loss expected to be reclassified into earnings in the next 12 months are $4.0 million. The ineffective portion, if any, of the change in fair value of the Company’s interest rate swap transactions is required to be recognized in earnings. As of June 30, 2017, the Company’s interest rate swap transactions were highly effective; during the three and six months ended June 30, 2017, hedge ineffectiveness of $2.8 million and $2.1 million, respectively, was recognized in earnings (included in Other income (expense), net on the consolidated statements of operation). During the three months ended June 30, 2016, the Company’s interest rate swap transactions were highly effective; hedge ineffectiveness of $1.6 million was recognized in earnings.

At June 30, 2017, the Company was a party to the following interest rate swaps, which are designated as 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):

June 30, 2017

Notional

Effective

Maturity

Fair Value

Fixed

Floating

Hedged Credit Facility

Amount

Date

Hierarchy

Interest Rate

Refinancing Facility

94,814

4/10/2017

9/3/2020

Level 2

1.6600%

1 mo. LIBOR

Refinancing Facility

23,703

4/18/2017

9/3/2020

Level 2

1.6480%

1 mo. LIBOR

Korean Export Credit Facility (1)

474,400

4/10/2017

9/30/2020

Level 2

1.8380%

3 mo. LIBOR

Korean Export Credit Facility (1)

88,950

4/10/2017

9/30/2020

Level 2

1.8645%

3 mo. LIBOR

Korean Export Credit Facility (1)

29,650

4/18/2017

9/30/2020

Level 2

1.8180%

3 mo. LIBOR

Sinosure Credit Facility

328,652

4/10/2017

3/21/2022

Level 2

2.0470%

3 mo. LIBOR

(1)

The initial aggregate notional amount of $599.7 million under the three interest rate swaps will increase up to the maximum aggregate notional amount of $610.0 million in October 2017 in order to effectively fix the interest rate on the target percentage of expected borrowings. The swap notional will amortize down hereafter.

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


		June 30, 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	$	—	$	—	$	—	$	—
Interest rate swap contracts - non-current	Non-current assets		—		432		19,585		—
Interest rate swap contracts - current	Current liabilities		—		(4,531)		(1,552)		—
Interest rate swap contracts - non-current	Non-current liabilities		—		(533)		—		—
Total derivatives designated as hedging instruments		$	—	$	(4,632)	$	18,033	$	—


	Offsetting of Derivative Assets
	June 30, 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	$	—	$	—	$	—	$	—	$	—	$	—
Counterparty 2		—		—		—		—		—		—
Counterparty 3		—		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—	$	—


	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
	June 30, 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	$	(4,165)	$	—	$	(4,165)	$	—	$	—	$	(4,165)
Counterparty 2		(104)		—		(104)		—		—		(104)
Counterparty 3		(363)		—		(363)		—		—		(363)
Total	$	(4,632)	$	—	$	(4,632)	$	—	$	—	$	(4,632)


	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 (dollars in thousands):


	Location of Gain or
	(Loss) Reclassified	Location of Gain	Three Months Ended				Six Months Ended
Derivatives in Cash Flow	from AOCI to	(Loss) Recognized	June 30, 2017				June 30, 2017
Hedging Relationships	Income	on Derivatives	2017		2016		2017		2016
Interest rate swap contracts (Effective Portion)
Amount of gain / (loss) recognized in OCI on derivatives	Interest Expense, net		$	(4,552)	$	14,108	$	(4,356)	$	14,108
Amount of gain / (loss) reclassified from AOCI into income on derivatives	Interest Expense, net			(82)		160		(909)		160

Interest rate swap contracts (Ineffective Portion)
Amount of gain / (loss) recognized in income on derivatives		Other expense, net	$	(2,771)		1,560	$	(2,088)		1,560