Derivatives and Hedging Activities

6 Months Ended

Jun. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Hedging Activities

5. Derivatives and Hedging Activities

On January 15, 2020, the Company entered into two interest rate swaps with UBS AG designed to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows on a portion of the current floating rate debt facilities. The swaps fix the variable interest rate of the current debt facilities and provide protection over potential interest rate increases by providing a fixed rate of interest payment in return. These interest rate swaps are for £95 million at a fixed rate of 0.9255% based on the 6-month LIBOR rate and for €60 million at a fixed rate of 0.102% based on the 6 month EUROLIBOR rate and are effective until maturity on October 1, 2023.

Hedges of Multiple Risks

The Company’s objectives in using interest rate derivatives are to add stability to interest and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its 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 the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. 

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in Accumulated Other Comprehensive Income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $1.5 million will be reclassified as an increase to interest expense.

As of June 30, 2020, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

Interest Rate Derivative	Number of Instruments	Notional
Interest rate swaps	2		£95 million at a fixed rate of 0.9255% based on the 6-month LIBOR rate and €60 million at a fixed rate of 0.102% based on the 6 month EUROLIBOR rate

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification in the consolidated balance sheet as of June 30, 2020.

	Balance Sheet Classification	Asset Derivatives Fair Value		Balance Sheet Classification	Liability Derivatives Fair Value
		(in millions)			(in millions)
Derivatives designated as hedging instruments:
Interest Rate Products	Fair Value of Hedging Instruments	$	—	Other Current Liabilities and long term Derivative Liability	$	(2.1	)
Total derivatives designated as hedging instruments		$	—		$	(2.1	)

The table below presents the effect of fair value and cash flow hedge accounting on Accumulated Other Comprehensive Income for the six months ended June 30, 2020.

	Amount of Gain/(Loss) Recognized in Other Comprehensive Income on Derivative				Location of  Gain/(Loss) Reclassified from Accumulated Other Comprehensive Income into Income
	(in millions)				(in millions)
Interest Rate and Foreign Exchange Products	$	(2.3	)	Interest Expense	$	(0.7	)
Total	$	(2.3	)		$	(0.7	)

The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Operations for the six months ended June 30, 2020.

	Interest Expense
	(in millions)
Total amounts of income and expense line items presented in the statement of operations and comprehensive loss in which the effects of fair value or cash flow hedges are recorded	$	14.2
Gain/(loss) on cash flow hedging relationships in Subtopic 815-20	$	(0.7	)

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of June 30, 2020. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheet.

The ISDA Master Agreement between Gaming Acquisitions Limited, a wholly-owned subsidiary of the Company, and UBS AG is documented using the 2002 Form and the ISDA standard set-off provision in Section 6(f) of the ISDA Master Agreement apply to both parties and is only modified to include Affiliates of the Payee. There is no CSA and thus there is no collateral posting.

Offsetting of Derivative Assets

June 30, 2020

Gross Amounts Not Offset in the Statement of Financial Position

Gross Amounts of Recognized Assets

Gross Amounts Offset in the Statement of Financial Position

Net Amounts of Assets presented in the Statement of Financial Position

Financial Instruments

Cash Collateral Received

Net Amount

(in millions)

Fair value of hedging instrument

$

—

$

—

$

—

$

—

$

—

$

—

Offsetting of Derivative Liabilities
June 30, 2020
							Gross Amounts Not Offset in the Statement of Financial Position
	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Statement of Financial Position		Net Amounts of Liabilities presented in the Statement of Financial Position		Financial Instruments		Cash Collateral Received		Net Amount
	(in millions)
Fair value of hedging instrument	$	2.1	$	—	$	2.1	$	—	$	—	$	—

Credit-risk-related Contingent Features

The Company has entered into an industry standard ISDA Master Agreement, with a negotiated Scheduled thereto (the “ISDA Agreement”), with the counterparty to its derivative transactions and which ISDA Agreement sets forth various provisions which govern the trading relationship between the Company and its counterparty. Such provisions include certain events which, if triggered by either party, may give rise to an acceleration of the ISDA Agreement, thus triggering the exchange of a breakage payment between the parties.

The ISDA Agreement with the Company’s derivative counterparty contains a provision where the Company could be declared in default on its derivative obligations if, among others, its repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. The ISDA Agreement can also be accelerated if Lucid Trustee Services Limited requests or requires that the lender terminates or closes-out any Transaction under the ISDA Agreement pursuant to Clause 4.10 of the Intercreditor Agreement between primarily the Company, Lucid Agency Services as Senior Agent and Lucid Trustee Services Limited as Security Agent; in the event of certain refinancing circumstances; and in the event of certain reductions in the principal with respect to amounts loaned under the Senior Facilities Agreement.

As of June 30, 2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to the ISDA Agreements was $2.1 million. As of June 30, 2020, the Company has not posted any collateral related to the ISDA Agreement, as no collateral is required under the terms of such ISDA Agreement. If the Company had breached any of the provision under the ISDA Agreement which resulted in an acceleration of the ISDA Agreement at June 30, 2020, it could have been required to settle its obligations under the ISDA Agreement at its termination value of $2.5 million