Derivative Financial Instruments

12 Months Ended

Dec. 31, 2020

Derivative Financial Instruments

Derivative Financial Instruments

7. Derivative Financial Instruments

In June 2019, we entered into the June 2019 Swap Agreements with an aggregate notional amount of $300.0 million to mitigate the risk of an increase in the LIBOR interest rate on the Second Amended and Restated Term Loan B. The term of the June 2019 Swap Agreements began in June 2019 and expires in June 2023. Upon execution, we designated and documented the June 2019 Swap Agreements as cash flow hedges. The June 2019 Swap Agreements serve as economic hedges and provide protection against rising interest rates.

In August 2019, we entered into the August 2019 Swap Agreements with an aggregate notional amount of $400.0 million to mitigate the risk of an increase in the LIBOR interest rate in effect on the Second Amended and Restated Term Loan B. The term of the August 2019 Swap Agreements began in August 2019 and expires in August 2024. Upon execution, we designated and documented the August 2019 Swap Agreements as cash flow hedges. The August 2019 Swap Agreements serve as economic hedges and provide protection against rising interest rates.

In March 2020, we executed a strategy commonly known as a “blend and extend” on $100.0 million of the June 2019 Swap Agreements that extended the length of one of the June 2019 Swap Agreements through April 2026. We extended the existing pay-fixed swap rate over a longer period than its original term at a lower interest rate, while maintaining the same overall value of the swap. The remaining $200.0 million of the June 2019 Swap Agreements did not change.

On April 22, 2020, we repaid $315.0 million of the Second Amended and Restated Term Loan B. In conjunction, the June 2019 Swap Agreements and the Modified June 2019 Swap Agreement were de-designated, since the hedged interest was no longer probable of occurring due to the repayment of the debt. As a result, $14.9 million was reclassified from accumulated other comprehensive loss to interest expense in the consolidated statement of operations. Consistent with company policy, we hold and issue derivative instruments for risk management purposes only and do not utilize derivative instruments for trading or speculative purposes. Accordingly, in April 2020 we entered into $300.0 million of notional amount counter-agreements (the “April 2020 Counter-agreements”) designed to economically offset the impact of the de-designated swap agreements.

By utilizing a derivative instrument to hedge our exposure to LIBOR rate changes, we are exposed to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. To mitigate this risk, hedging instruments are placed with counterparties that we believe pose minimal credit risk. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, commodity prices or currency exchange rates. We manage the market risk associated with derivative instruments by establishing and monitoring parameters that limit the types and degree of market risk that we may undertake. We hold and issue derivative instruments for risk management purposes only and do not utilize derivatives for trading or speculative purposes.

We record derivative instruments at fair value on our consolidated balance sheets. When in qualifying relationships, the gains and losses on cash flow designated derivatives are deferred in accumulated other comprehensive loss (“AOCL”) and are reclassified to interest expense when the forecasted transaction takes place. The fair value of derivatives that are not designated as hedging instruments are recorded directly to “interest expense”. Derivative assets and derivative liabilities that have maturity dates equal to or less than twelve months from the balance sheet date are included in prepaid expenses and other current assets and other accrued liabilities, respectively. Derivative assets and derivative liabilities that have maturity dates greater than twelve months from the balance sheet date are included in deposits and other assets and other long-term liabilities, respectively.

Our derivatives are measured on a recurring basis using Level 2 inputs and the income approach. The fair value measurements of our derivatives are based on quoted prices and other inputs that are observable.

Derivative assets recorded at fair value in our consolidated balance sheets as of December 31, 2020 and 2019, respectively, consisted of the following:

	Derivative Assets
(Amounts in thousands)	December 31, 2020		December 31, 2019
Derivatives Designated as Cash Flow Hedges
Interest Rate Swap Agreements — Current	$	—	$	485
Interest Rate Swap Agreements — Noncurrent		—		1,440
Derivatives Not Designated as Hedging Instruments
Interest Rate Swap Agreements - Current		877		—
Interest Rate Swap Agreements - Noncurrent		585		—
	$	1,462	$	1,925

Derivative liabilities recorded at fair value in our consolidated balance sheets as of December 31, 2020 and December 31, 2019, respectively, consisted of the following:

	Derivative Liabilities
(Amounts in thousands)	December 31, 2020		December 31, 2019
Derivatives Designated as Cash Flow Hedges
Interest Rate Swap Agreements — Current	$	(5,251)	$	(788)
Interest Rate Swap Agreements — Noncurrent		(11,633)		(2,667)
Derivatives Not Designated as Hedging Instruments
Interest Rate Swap Agreements - Current		(4,875)		—
Interest Rate Swap Agreements - Noncurrent		(9,032)		—
	$	(30,791)	$	(3,455)

Losses before taxes on derivatives not designated as a cash flow hedge of $0.6 million were presented in “Interest expense” in the consolidated statement of operations for the year ended December 31, 2020.

Gains and losses before taxes on derivatives designated as hedging instruments were presented in “Interest expense” in the consolidated statement of operations for the years ended December 31, 2020, 2019 and 2018 were as follows:

	Loss						Loss Reclassified from
	Recognized in AOCL						AOCL into Operations
(Amounts in thousands)	2020		2019		2018		2020		2019		2018
Interest Rate Swap Agreements	$	(33,902)	$	(484)	$	—	$	(3,685)	$	1,046	$	—
Total	$	(33,902)	$	(484)	$	—	$	(3,685)	$	1,046	$	—

As of December 31, 2020, we expect to reclassify net losses of $5.3 million, currently recorded in AOCL, into “Interest expense, net” within the next twelve months. However, the actual amount reclassified could vary due to future changes in the fair value of these derivatives.

During the year ended December 31, 2020, we recognized in AOCL a loss of $33.9 million related to our swap agreements. This loss was caused by a decrease in both current interest rates, the interest rate forward curve and the expectation of future payment by us to our hedging counterparties based on current assumptions of the market. Upon de-designation of the June 2019 Swap Agreements and the Modified June 2019 Swap Agreement, we reclassified $14.9 million from accumulated other comprehensive loss to interest expense in the consolidated statement of operations.