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FINANCIAL INSTRUMENTS
 9 Months Ended
Sep. 30, 2017
FINANCIAL INSTRUMENTS  
FINANCIAL INSTRUMENTS

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 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 interest rate for such transaction multiplied by the relevant notional amount for that period in exchange for a payment from the respective swap counterparty in an amount equal to a variable 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. The swaps were dedesignated and the revised swaps were simultaneously redesignated with no interruption in hedge accounting. In April 2017, all six of the swap agreements were monetized (the current fair market value of $18.2 million was received from the swap counterparties) and dedesignated. The effective portion of the gain on the swaps at dedesignation was deferred in Other Comprehensive Income / (loss) and the Company is recognizing the gain over the original hedge periods (September 2, 2020 for the swaps hedging the Refinancing Facility, February 20, 2029 for the swaps hedging the Korean Export Credit Facility and May 6, 2028 for the swap hedging the Sinosure Credit Facility). Simultaneously, the revised swaps were designated in a cash flow relationship with a fair market value at designation of zero, which 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.

 

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% - 80% 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 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 replacement 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 enter into a new 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. In September 2017 the Company early adopted ASU 2017-12 which amends ASC 815 and hedge accounting. Under the new guidance, effectiveness is no longer measured and all changes in the fair market value of derivatives are recorded in AOCI for effective hedge relationships. The Company has elected to continue testing effectiveness quantitatively using regression analysis. All derivatives outstanding as of the prior year-end were dedesignated in April, 2017 as discussed above and thus there is no impact on the opening balance of equity as a result of adoption. The impact to the current year financials was a reversal of the cumulative ineffectiveness recognized from the new designation in April 2017 through adoption of $2.6 million. See Note 1, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES for more details on the recent adoption of ASU 2017-12.

 

The changes in fair market value of the swaps, including adjustments for non-performance risk, which are designated and qualify as cash flow hedges, are classified in Other Comprehensive Income (Loss) (“OCI”). These amounts are reclassified from AOCI to interest expense when the hedged interest payments are recognized in interest expense, net in the condensed consolidated statements of operations.

 

Amounts in Accumulated Other Comprehensive Income (Loss) expected to be reclassified into earnings in the next 12 months total a gain of $1.1 million.

 

At September 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 Sinosure Credit Facility (dollars in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2017

 

 

 

Notional

 

Effective

 

Maturity

 

Fair Value

 

Fixed

 

Floating

 

Hedged Credit Facility

    

Amount

    

Date

    

Date

    

Hierarchy

    

Interest Rate

    

Interest Rate

 

Refinancing Facility

 

$

88,041

 

 

4/10/2017

 

 

9/3/2020

 

 

Level 2

 

 
1.6600%

 

1 mo. LIBOR

 

Refinancing Facility

 

 

22,010

 

 

4/18/2017

 

 

9/3/2020

 

 

Level 2

 

 
1.6480%

 

1 mo. LIBOR

 

Korean Export Credit Facility (1)

 

 

462,400

 

 

4/10/2017

 

 

9/30/2020

 

 

Level 2

 

 
1.8380%

 

3 mo. LIBOR

 

Korean Export Credit Facility (1)

 

 

86,700

 

 

4/10/2017

 

 

9/30/2020

 

 

Level 2

 

 
1.8645%

 

3 mo. LIBOR

 

Korean Export Credit Facility (1)

 

 

28,900

 

 

4/18/2017

 

 

9/30/2020

 

 

Level 2

 

 
1.8180%

 

3 mo. LIBOR

 

Sinosure Credit Facility

 

 

322,758

 

 

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 increased 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 condensed consolidated balance sheet and statement of operations (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 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

 

 

234

 

 

1,025

 

 

19,585

 

 

 —

 

Interest rate swap contracts - current

 

Current liabilities

 

 

(203)

 

 

(3,280)

 

 

(1,552)

 

 

 —

 

Interest rate swap contracts - non-current

 

Non-current liabilities

 

 

 —

 

 

(166)

 

 

 —

 

 

 —

 

Total derivatives designated as hedging instruments

 

 

 

$

31

 

$

(2,421)

 

$

18,033

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Offsetting of Derivative Assets

 

 

 

September 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

 

$

 —

 

$

22

 

$

22

 

$

(22)

 

$

 —

 

$

 —

 

Counterparty 2

 

 

 —

 

 

 9

 

 

 9

 

 

(9)

 

 

 —

 

 

 —

 

Counterparty 3

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Total

 

$

 —

 

$

31

 

$

31

 

$

(31)

 

$

 —

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

September 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

 

$

(2,226)

 

$

(22)

 

$

(2,248)

 

$

22

 

$

 —

 

$

(2,226)

 

Counterparty 2

 

 

(8)

 

 

(9)

 

 

(17)

 

 

 9

 

 

 —

 

 

(8)

 

Counterparty 3

 

 

(157)

 

 

 —

 

 

(157)

 

 

 —

 

 

 —

 

 

(157)

 

Total

 

$

(2,391)

 

$

(31)

 

$

(2,422)

 

$

31

 

$

 —

 

$

(2,391)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 fair value and cash flow hedge accounting on the condensed consolidated statements of operations (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the nine months ended September 30,

 

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

Interest expense, net (where the effects of fair value or cash flow hedges are recorded)

 

 

 

$

(63,040)

 

$

(31,355)

 

 

 

 

 

 

 

 

 

The effects of fair value and cash flow hedging

 

 

 

 

 

 

 

 

Gain / (loss) on cash flow hedging relationships in Subtopic 815-20:

 

 

 

 

 

 

 

 

Interest rate contracts:

 

 

 

 

 

 

 

 

Amount reclassified from AOCI to net (loss) income on derivative

 

 

 

$

(1,228)

 

$

1,502

Amount reclassified from AOCI to net (loss) income as a result that a forecasted transaction is no longer probable of occurring

 

 

 

 

 —

 

 

 —

 

The following table provides the effect of derivatives on the condensed consolidated statements of operations (dollars in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

  

Location of Gain or

  

 

 

  

 

  

 

 

  

 

  

 

 

(Loss) Reclassified

 

Three Months Ended

 

Nine Months Ended

 

Derivatives in Cash Flow

 

from AOCI to

 

September 30,

 

September 30,

 

Hedging Relationships

 

Income

 

2017

 

2016

 

2017

 

2016

 

Interest rate swap contracts (Effective Portion)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount recognized in other comprehensive income (loss) on derivative

 

Interest Expense, net

 

$

(2,003)

 

$

(5,207)

 

$

(6,359)

 

$

8,901

 

Amount reclassified from AOCI to net (loss) income on derivative

 

Interest Expense, net

 

 

(319)

 

 

1,342

 

 

(1,228)

 

 

1,502