8. 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 13, LONG TERM DEBT. Under each interest rate swap transaction, a subsidiary of the Company makes a payment each monthly period in an amount equal to the fixed 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, the Company modified the swap agreements. All six of the swap agreements were monetized (the then-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 (Loss) / Income (“OCI”) 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 54% 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 92% 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 expense) 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 OCI. These amounts are reclassified from AOCI to interest expense when the hedged interest payments are recognized in interest expense, net in the consolidated statements of operations.

Amounts in AOCI expected to be reclassified into earnings in the next 12 months total a gain of $4.1 million.

At December 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 Sinosure Credit Facility (dollars in thousands):

December 31, 2017

Notional

Effective

Maturity

Fair Value

Fixed

Floating

Hedged Credit Facility

Amount

Date

Hierarchy

Interest Rate

Refinancing Facility

81,269

4/10/2017

9/3/2020

Level 2

1.6600%

1 mo. LIBOR

Refinancing Facility

20,317

4/18/2017

9/3/2020

Level 2

1.6480%

1 mo. LIBOR

Korean Export Credit Facility (1)

488,000

4/10/2017

9/30/2020

Level 2

1.8380%

3 mo. LIBOR

Korean Export Credit Facility (1)

91,500

4/10/2017

9/30/2020

Level 2

1.8645%

3 mo. LIBOR

Korean Export Credit Facility (1)

30,500

4/18/2017

9/30/2020

Level 2

1.8180%

3 mo. LIBOR

Sinosure Credit Facility

316,863

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 notional amount of the swaps will amortize down thereafter.

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


		December 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	$	70	$	—	$	—	$	—
Interest rate swap contracts - non-current	Non-current assets		6,020		—		19,585		—
Interest rate swap contracts - current	Current liabilities		(852)		—		(1,552)		—
Interest rate swap contracts - non-current	Non-current liabilities		—		—		—		—
Total derivatives designated as hedging instruments		$	5,238	$	—	$	18,033	$	—


	Offsetting of Derivative Assets
	December 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	$	4,470	$	—	$	4,470	$	—	$	—	$	4,470
Counterparty 2		304		—		304		—		—		304
Counterparty 3		464		—		464		—		—		464
Total	$	5,238	$	—	$	5,238	$	—	$	—	$	5,238


	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, 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	$	—	$	—	$	—	$	—	$	—	$	—
Counterparty 2		—		—		—		—		—		—
Counterparty 3		—		—		—		—		—		—
Total	$	—	$	—	$	—	$	—	$	—	$	—


	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 consolidated statements of operations (dollars in thousands):


	For the Years Ended December 31,
	2017		2016		2015

Interest expense, net (where the effects of fair value or cash flow hedges are recorded)	$	(82,764)	$	(49,627)	$	(15,982)

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	$	(1,403)	$	(2,692)	$	—
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 consolidated statements of operations (dollars in thousands):


	Location of Gain or
	(Loss) Reclassified	For the Years Ended December 31,
Derivatives in Cash Flow	from AOCI to
Hedging Relationships	Income	2017		2016
Interest rate swap contracts (Effective Portion)
Amount recognized in other comprehensive (loss) income on derivative	Interest Expense, net	$	(152)	$	14,642
Amount reclassified from AOCI to net (loss) / income on derivative	Interest Expense, net		(1,403)		(2,692)