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Fair Value of Financial Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2020

Fair Value of Financial Instruments and Hedging Activities

Fair value measurements are based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity's own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy) has been established.

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability that are typically based on an entity's own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the asset or liability.

The fair value of Cash and cash equivalents, Rent and other receivables, Construction costs payable, Dividends payable and Accounts payable and accrued expenses approximate their carrying value because of the short-term nature of these financial instruments. The carrying value, exclusive of deferred financing costs, for the revolving credit facilities and the floating rate term loans approximate estimated fair value as of March 31, 2020 and December 31, 2019, due to the floating rate nature of the interest rates and the stability of our credit ratings.

We determine the fair value of our derivative financial instruments using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves, foreign exchange rates and implied volatilities. We determine the fair values of our interest rate swaps using the market standard methodology of netting the discounted future fixed cash receipts or payments and the discounted expected variable cash payments. We base the variable cash payments on an expectation of future interest rates, or forward curves, derived from observable market interest rate curves. We base the fair values of our net investment hedges on the change in the spot rate at the end of the period as compared with the strike price at inception.

We incorporate credit valuation adjustments to appropriately reflect nonperformance risk for us and the respective counterparty in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we consider the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

We have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy. Although the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties, we assess the significance of the impact of the credit

valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives.

The carrying value and fair value of other financial instruments are as follows (in millions):



	March 31, 2020				December 31, 2019
	Carrying Value		Fair Value		Carrying Value		Fair Value
2024 Notes - 2.900%	$	599.2	$	580.1	$	599.2	$	602.1
2029 Notes - 3.450%	598.3		536.3		598.2		603.1
2027 Notes - 1.450%	549.3		478.9		—		—
GDS Equity investment	133.4		133.4		118.7		118.7

The fair values of our 2024 Notes, 2027 Notes and 2029 Notes as of March 31, 2020 were based on the quoted market prices for these notes, which is considered Level 1 of the fair value hierarchy. The fair value of the GDS equity investment as of March 31, 2020 was based on the quoted market price for the stock which is considered Level 1 of the fair value hierarchy.

Hedging Activities

When we use derivative instruments, it is generally to reduce our exposure to fluctuations in interest rates and foreign currency exchange rate movements. We have not entered into, and do not plan to enter into, financial instruments for trading or speculative purposes. To manage foreign currency exposure, we have entered into Euro denominated debt and cross-currency swaps to hedge the Company's net investment in its Euro functional currency consolidated subsidiaries and the variability in EUR-USD exchange rate.

Accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the designation of the derivative, including whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as foreign currency risk or interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.

For derivatives designated as "cash flow" hedges, the change in the fair value of the derivative is initially reported in Other comprehensive income ("OCI") in our Condensed Consolidated Statements of Comprehensive Income (Loss) and subsequently reclassified into Gain (loss) when the hedged transaction affects earnings, or the hedging relationship is no longer highly effective. We assess the effectiveness of each hedging relationship whenever financial statements are issued, or earnings are reported and at least every three months. We also use derivatives, such as foreign currency swaps, that are not designated as hedges to manage foreign currency exchange rate risks. The changes in fair values of these derivatives that were not designated or did not qualify as hedging instruments are immediately, recognized in earnings within the line item Foreign currency and derivative gains, net in the Condensed Consolidated Statements of Operations.

The following table summarizes the Company's derivative positions as of March 31, 2020 and December 31, 2019, (in millions):



						March 31, 2020				December 31, 2019
		Maturity Date	Notional Amount		Hedged Risk	Asset		Liability		Asset		Liability
Undesignated derivatives
Cross Currency Swaps
	EUR - USD	01/15/2020	$	265.3	Foreign currency exchange	$	—	$	—	$	—	$	2.1
	EUR - USD	01/15/2020	25.6		Foreign currency exchange	—		—		—		0.2

Designated derivatives
Cross Currency Swaps
	EUR - USD	3/29/2023	250.0		Net investment hedge	0.4		—		—		3.8
	EUR - USD	3/29/2023	250.0		Net investment hedge	0.2		—		—		3.9
	EUR - USD	01/15/2020	155.9		Net investment hedge	—		—		—		1.4

Interest Rate Swaps
	USD Libor	3/29/2023	300.0		Interest rate hedge - Float to fixed	—		7.9		3.5		—

Total			$	1,246.8		$	0.6	$	7.9	$	3.5	$	11.4

Cross-Currency Swaps

The Company has entered into cross-currency swaps whereby the Company pays floating interest rate and receives floating interest rate to hedge the variability of future cash flows attributable to changes in the 1-month USD LIBOR versus EUR LIBOR rates (a pay-floating, receive-floating interest rate swap). The pay-floating, receive-floating interest rate swap payments are recognized in Interest expense, net in the Condensed Consolidated Statements of Operations.

As of March 31, 2020, the Company has two cross-currency EUR/USD contracts to sell $500.0 million and purchase €450.7 million maturing in March 2023 representing a fair value asset of $0.6 million. The Company recognized a $4.5 million gain on cross-currency contracts for the three months ended March 31, 2020, which are recognized in Foreign currency and derivative gains, net in the Condensed Consolidated Statements of Operations.

Interest Rate Swaps

On September 3, 2019, the Company entered into a floating-fixed interest rate swap agreement to convert $300.0 million of variable interest rate debt of the 2023 Term Loan Facility to 1.19% fixed rate debt.

Net Investment Hedges

Exchange rate variations impact our financial results because the financial results of our foreign subsidiaries are translated to U.S. dollars each period, with the effect of exchange rate variations being recorded in OCI as part of the cumulative foreign currency translation adjustment. As a result, changes in the value of our borrowings under the foreign currency denominated revolver under our Revolving Credit Facility, 2027 Notes and synthetically swapped debt will be reported in the same manner as foreign currency translation adjustments, which are recorded in OCI as part of the cumulative foreign currency translation adjustment. As of March 31, 2020, our cross-currency swaps were an asset of $0.6 million reported in Other assets, and interest rate swaps were a liability of $7.9 million reported in Other liabilities. As of December 31, 2019, our cross-currency swaps were a liability of $11.4 million reported in Other liabilities, and interest rate swaps were an asset of $3.5 million reported in Other assets.

The fair values of qualifying instruments used in hedging transactions as of March 31, 2020 and December 31, 2019 are as follows (in millions):



	Balance Sheet Location	March 31, 2020		December 31, 2019
Derivatives Designated as Hedging Instruments
Assets:
Cross-Currency Swaps	Other Assets	$	0.6	$	—
Interest Rate Swap	Other Assets	—		3.5
Total		$	0.6	$	3.5
Liabilities:
Interest Rate Swap	Other Liabilities	$	7.9	$	—
Cross-Currency Swaps	Other Liabilities	—		9.1
Total		$	7.9	$	9.1

The following table presents the effect of our derivative financial instruments on our accompanying condensed consolidated financial statements (in millions):



	For the Three Months Ended March 31,
	2020			2019
Derivatives in Cash Flow Hedging Relationships
Cross-Currency and Interest Rate Swaps:
Amount of gain (loss) recognized in OCI for derivatives	$	(1.1	)	$	2.7
Amount of gain (loss) reclassified from accumulated OCI for derivatives	$	—		$	—
Amount of gain (loss) recognized in earnings	$	—		$	—

During the next 12 months, we estimate that immaterial amounts will be reclassified from "Accumulated OCI" to Net income.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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