Interest Rate Swaps

Risk Management Objective of Using Derivatives

We are exposed to certain risks arising from both our business operations and economic conditions. We principally manage our exposures to a wide variety of business and operational risks through management of our core business activities. We manage economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources and duration of our debt funding and the use of derivative financial instruments. Specifically, we enter into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. Our derivative financial instruments are used to manage differences in the amount, timing and duration of our known or expected cash payments principally related to our borrowings.

Derivative Instruments

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage exposure to interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional value. We do not use derivatives for trading or speculative purposes.

The effective portion of the change in fair value of derivatives designated and qualifying as cash flow hedges is initially recorded in accumulated other comprehensive income/(loss) (“AOCI”) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is immediately recognized in earnings.

On August 11, 2017, we entered into an interest rate swap transaction to manage our exposure to fluctuations in variable interest rate associated with the Amended $100 Million Term Loan. The interest rate swap has a notional value of $100.0 million with an effective date of December 14, 2018, and a maturity date of August 14, 2021 (the “New Swap”). The effective date coincides with the termination date of our two in-place interest rate swaps, each of which has a notional value of $50 million, that currently fix the annual interest rate payable on the Amended $100 Million Term Loan at 1.8975% plus an applicable margin under the terms of the Amended Credit Agreement. Under the terms of the New Swap, we are required to make certain monthly fixed rate payments calculated on a notional value of $100 million, while the counterparty is obligated to make certain monthly floating rate payments based on LIBOR to us referencing the same notional value. Upon termination of the two in-place swaps, the New Swap will effectively fix the annual interest rate payable on the Amended $100 Million Term Loan at 1.764% plus an applicable margin under the terms of the Amended Credit Agreement.

The following table sets forth a summary of our interest rate swaps at September 30, 2017 and December 31, 2016 (dollars in thousands):



					Fair Value				Current Notional Value⁽¹⁾
Derivative Instrument	Effective Date	Maturity Date	Interest Strike Rate		September 30, 2017		December 31, 2016		September 30, 2017		December 31, 2016
Assets⁽²⁾:
Interest Rate Swap	2/14/2018	1/14/2022	1.349	%	$	2,521	$	3,245	$	—	$	—
Interest Rate Swap	8/14/2018	1/14/2022	1.406	%	$	1,763	$	2,349	$	—	$	—
Interest Rate Swap	12/14/2018	8/14/2021	1.764	%	$	468	$	—	$	—	$	—
Liabilities⁽³⁾:
Interest Rate Swap	1/15/2015	2/15/2019	1.826	%	$	121	$	338	$	30,000	$	30,000
Interest Rate Swap	7/15/2015	2/15/2019	2.010	%	$	187	$	440	$	29,087	$	29,674
Interest Rate Swap	8/14/2015	12/14/2018	1.790	%	$	174	$	529	$	50,000	$	50,000
Interest Rate Swap	2/16/2016	12/14/2018	2.005	%	$	303	$	738	$	50,000	$	50,000


(1)	Represents the notional value of swaps that are effective as of the balance sheet date presented.


(2)	The fair value of these interest rate swaps is included in the line item “Interest rate swap asset” in the accompanying consolidated balance sheets.


(3)	The fair value of these interest rate swaps is included in the line item “Interest rate swap liability” in the accompanying consolidated balance sheets.

Derivative instruments that are subject to master netting arrangements and qualify for net presentation in the consolidated balance sheets are presented on a gross basis in the consolidated balance sheets as of September 30, 2017 and December 31, 2016. As of September 30, 2017, if we had recognized these derivative instruments on a net basis, we would have reported an interest rate swap asset of $4.0 million and an interest rate swap liability of zero, which represent the net balances after the effect of offsetting with counterparties where we had both derivative assets and derivative liabilities.

The following table sets forth the impact of our interest rate swaps on our consolidated statements of operations for the periods presented (in thousands):



	Three Months Ended September 30,						Nine Months Ended September 30,
	2017			2016			2017			2016
Interest Rate Swaps in Cash Flow Hedging Relationships:
Amount of gain (loss) recognized in AOCI on derivatives (effective portion)	$	382		$	1,036		$	(672	)	$	(4,465	)
Amount of loss reclassified from AOCI into earnings under “Interest expense” (effective portion)	$	(280	)	$	(577	)	$	(1,090	)	$	(1,671	)
Amount of gain (loss) recognized in earnings under “Interest expense” (ineffective portion and amount excluded from effectiveness testing)	$	—		$	—		$	—		$	—

During the next twelve months, we estimate that an additional $0.5 million will be reclassified from AOCI into earnings as an increase to interest expense.

Credit-risk-related Contingent Features

Certain of our agreements with our derivative counterparties contain a provision where if we default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender within a specified time period, then we could also be declared in default on its derivative obligations.

Certain of our agreements with our derivative counterparties contain provisions where if a merger or acquisition occurs that materially changes our creditworthiness in an adverse manner, we may be required to fully collateralize our obligations under the derivative instrument.