Fair Value of Financial Instruments, Derivatives and Fair Value Disclosures

3 Months Ended

Mar. 31, 2015

Note 10 —Fair Value of Financial Instruments, Derivatives and Fair Value Disclosures:

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash and cash equivalents and restricted cash — The carrying amounts reported in the condensed consolidated balance sheet for interest-bearing deposits approximate their fair value.

Debt— The fair values of the Company’s publicly traded and non-publicly traded debt at March 31, 2015 are estimated based on quoted market prices.

Interest rate swaps and caps— The fair values of interest rate swaps and caps are the estimated amounts that the Company would receive or pay to terminate the swaps or caps at the reporting date, which include adjustments for the counterparty or the Company’s credit risk, as appropriate, after taking into consideration any underlying collateral securing the swap or cap agreements.

ASC 820, Fair Value Measurements and Disclosures, relating to fair value measurements defines fair value and established a framework for measuring fair value. The ASC 820 fair value hierarchy distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity and the reporting entity's own assumptions about market participant assumptions developed based on the best information available in the circumstances. ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price. In addition, the fair value of assets and liabilities should include consideration of non-performance risk, which for the liabilities described below includes the Company's own credit risk.

The levels of the fair value hierarchy established by ASC 820 are as follows:

Level 1-Quoted prices in active markets for identical assets or liabilities

Level 2-Quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3-Inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

The estimated fair values of the Company’s financial instruments, other than derivatives, that are not measured at fair value on a recurring basis, categorized based upon the fair value hierarchy, are as follows:

	Fair Value		Level 1		Level 2
March 31, 2015:
Cash⁽¹⁾	$	595,331	$	595,331	$	-
8.125% notes due 2018		(300,270)		-		(300,270)
OBS Term Loan due 2019		(604,462)		-		(604,462)
OIN Term Loan due 2019		(632,238)		-		(632,238)
7.5% Election 1 notes due 2021		(5,747)		-		(5,747)
7.5% Election 2 notes due 2021		(131,426)		-		(131,426)
7.5% notes due 2024		(604)		-		(604)

December 31, 2014:
Cash⁽¹⁾	$	512,404	$	512,404	$	-
8.125% notes due 2018		(294,300)		-		(294,300)
OBS Term Loan due 2019		(589,863)		-		(589,863)
OIN Term Loan due 2019		(618,981)		-		(618,981)
7.5% Election 1 notes due 2021		(5,511)		-		(5,511)
7.5% Election 2 notes due 2021		(131,773)		-		(131,773)
7.5% notes due 2024		(626)		-		(626)

⁽¹⁾

Includes restricted cash of $118,010 and $123,178 at March 31, 2015 and December 31, 2014, respectively.

Derivatives

Interest Rate Risk

The Company uses interest rate caps and swaps for the management of interest rate risk exposure. The interest rate caps effectively convert a portion of the Company’s debt from a floating to a fixed rate and were designated and qualified as cash flow hedges. At March 31, 2015, OBS and OIN were party to two separate interest rate cap agreements (“Interest Rate Cap”) each with a start date of February 5, 2015 with major financial institutions covering notional amounts of $375,000 and $400,000, respectively, to limit the floating interest rate exposure associated with their respective term loans. The Interest Rate Cap agreements contain no leverage features. The OBS Interest Rate Cap has a cap rate of 2.5% through February 5, 2017, at which time the cap rate increases to 3.0% through the termination date of February 5, 2018. The OIN Interest Rate Cap has a cap rate of 2.5% through the termination date of February 5, 2017.

Tabular disclosure of derivatives location

Derivatives are recorded in the March 31, 2015 balance sheet on a net basis by counterparty when a legal right of offset exists. The following table presents information with respect to the fair values of derivatives reflected in the March 31, 2015 balance sheet on a gross basis by transaction.

	Asset Derivatives			Liability Derivatives
March 31, 2015	Balance Sheet Location	Amount		Balance Sheet Location	Amount
Derivatives designated as hedging instruments:

Interest rate caps:
Long-term portion	Other assets	$	927	Other liabilities	$	-
Total derivatives designated as hedging instruments		$	927		$	-

	Asset Derivatives			Liability Derivatives
December 31, 2014	Balance Sheet Location	Amount		Balance Sheet Location	Amount
Derivatives designated as hedging instruments:

Interest rate caps:
Long-term portion	Other assets	$	2,115	Other liabilities	$	-
Total derivatives designated as hedging instruments		$	2,115		$	-

The Interest Rate Cap agreements had no effect on the consolidated statement of operations for the three month period ended March 31, 2015.

The effect of cash flow hedging relationships recognized in other comprehensive income/(loss) excluding amounts reclassified from accumulated other comprehensive income (effective portion), including hedges of equity method investees, for the three months period ended March 31, 2015 and March 31, 2014 follows:

	Three Months Ended
	March 31,
	2015		2014
Interest rate swaps	$	(7,431)	$	(6,843)
Interest rate caps		(1,187)		-
Total	$	(8,618)	$	(6,843)

See Note 8, “Equity Method Investments,” for additional information relating to derivatives held by the Company’s equity method investees and Note 13, “Accumulated Other Comprehensive Loss,” for disclosures relating to the impact of derivative instruments on accumulated other comprehensive loss.

Fair Value Hierarchy

The following table presents the fair values, which are pre-tax, for assets and liabilities measured on a recurring basis (excluding investments in affiliated companies):

	Fair Value		Level 1		Level 2

Assets at March 31, 2015:
Derivative Assets (interest rate caps)	$	927	$	-	$	927	(1)

Assets at December 31, 2014:
Derivative Assets (interest rate caps)	$	2,115	$	-	$	2,115	(1)

(1)

For interest rate caps, fair values are derived using valuation models that utilize the income valuation approach. These valuation models take into account contract terms such as maturity, as well as other inputs such as interest rate yield curves and creditworthiness of the counterparty and the Company.

- 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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