Derivative Financial Instruments

12 Months Ended

Dec. 31, 2015

Derivative Financial Instruments

Derivative Financial Instruments

NOTE 24.    Derivative Financial Instruments

The following table summarizes the Company’s outstanding interest-rate and foreign currency swap contracts as of December 31, 2015 (dollars and GBP in thousands):

			Fixed
		Hedge	Rate/Buy				Notional/Sell
Date Entered	Maturity Date	Designation	Amount			Floating/Exchange Rate Index	Amount		Fair Value(1)
Interest rate:
July 2005(2)	July 2020	Cash Flow		3.82	%	BMA Swap Index	$	45,600	$	(5,430)
November 2008(3)	October 2016	Cash Flow		5.95	%	1 Month LIBOR+1.50%	$	25,100		(761)
July 2012(4)	June 2016	Cash Flow		1.81	%	1 Month GBP LIBOR+1.20%	£	137,000		(60)
January 2015(4)	October 2017	Cash Flow		1.79	%	1 Month GBP LIBOR+0.975%	£	220,000		196
Foreign currency:
July 2012(5)	June 2016	N/A	$	11,400		Buy USD/Sell GBP	£	7,200		685
January 2015(6)	October 2017	Cash Flow	$	35,100		Buy USD/Sell GBP	£	23,200		866

(1) Derivative assets are recorded in other assets, net and derivative liabilities are recorded in accounts payable and accrued liabilities on the consolidated balance sheets.

(2) Represents three interest-rate swap contracts, which hedge fluctuations in interest payments on variable-rate secured debt due to overall changes in hedged cash flows.

(3) Represents an interest-rate swap contract, that hedges the fluctuation in interest payments on variable-rate secured debt due to overall changes in hedged cash flows

(4) Hedges fluctuations in interest payments on variable-rate unsecured debt due to fluctuations in the underlying benchmark interest rate.

(5) Currency swap contract (buy USD/sell GBP) hedges the foreign currency exchange risk related to a portion of the Company’s forecasted interest receipts on GBP denominated senior unsecured notes. Represents a currency swap to sell £7.2 million at a rate of 1.5695in June 2016.

(6) Currency swap contract (buy USD/sell GBP) hedges the foreign currency exchange risk related to the Company’s forecasted GBP denominated interest receipts on its HC-One Facility. Represents a currency swap to sell approximately £1.0 million monthly at a rate of 1.5149 through October 2017.

The Company uses derivative instruments to mitigate the effects of interest rate and foreign currency fluctuations on specific forecasted transactions as well as recognized financial obligations or assets. Utilizing derivative instruments allows the Company to manage the risk of fluctuations in interest and foreign currency rates related to the potential impact these changes could have on future earnings and forecasted cash flows. The Company does not use derivative instruments for speculative or trading purposes.

The primary risks associated with derivative instruments are market and credit risk. Market risk is defined as the potential for loss in value of a derivative instrument due to adverse changes in market prices. Credit risk is the risk that one of the parties to a derivative contract fails to perform or meet their financial obligation. The Company does not obtain collateral associated with its derivative contracts, but monitors the credit standing of its counterparties on a regular basis. Should a counterparty fail to perform, the Company would incur a financial loss to the extent that the associated derivative contract was in an asset position. At December 31, 2015, the Company does not anticipate non-performance by the counterparties to its outstanding derivative contracts.

As of December 31, 2015, the Company designated £268 million of its GBP-denominated borrowings under the Facility and 2012 term loan as a hedge of a portion of the Company’s net investments in GBP-functional subsidiaries to mitigate its exposure to fluctuations in the GBP to USD exchange rate. For instruments that are designated and qualify as net investment hedges, the variability in the foreign currency to USD exchange rate of the instrument is recorded as part of the cumulative translation adjustment component of accumulated other comprehensive income (loss). Accordingly, the remeasurement value of the designated £268 million GBP-denominated borrowings due to fluctuations in the GBP to USD exchange rate are reported in accumulated other comprehensive income (loss) as the hedging relationship is considered to be effective. The cumulative balance of the remeasurement value will be reclassified to earnings when the hedged investment is sold or substantially liquidated.

In December 2010, the Company assumed a cash flow hedge as part of a real estate acquisition. During the years ended December 31, 2015 and 2014, the Company determined a portion of the hedge was ineffective and reclassified $500,000 and $2 million, respectively, of unrealized gains related to this interest-rate swap contract into other income, net.

On July 27, 2012, the Company entered into a foreign currency swap contract to hedge the foreign currency exchange risk related to a portion of the forecasted interest receipts from its GBP denominated Four Seasons Notes (see Note 10). The cash flow hedge has a fixed USD/GBP exchange rate of 1.5695 (buy $11 million and sell £7 million semi-annually) for a portion of its forecasted semi-annual interest receipts denominated in GBP. The foreign currency swap contract matures in June 2016 (the end of the non-call period of the Four Seasons Notes). In September 2015, the Company ceased hedge accounting on this foreign currency swap contract and reclassified $0.5 million from accumulated other comprehensive income (loss)to other income, net, and all future changes in fair value of the foreign currency swap contract will be recognized in earnings.  The fair value of the contract at December 31, 2015 was $0.7 million and is included in other assets, net.

On July 27, 2012, the Company entered into an interest-rate swap contract that is designated as hedging the interest payments on its GBP denominated 2012 Term Loan due to fluctuations in the underlying benchmark interest rate (see Note 11). The cash flow hedge has a notional amount of £137 million and expires in June 2016.

On January 12, 2015, the Company entered into an interest-rate swap contract that is designated as hedging the interest payments on its GBP denominated 2015 Term Loan due to fluctuations in the underlying benchmark interest rate (see Note 11). The cash flow hedge has a notional amount of £220 million and matures in October 2017.

On January 12, 2015, the Company entered into a foreign currency swap contract to hedge the foreign currency exchange risk related to a portion of the forecasted GBP interest receipts from its HC-One Facility (see Note 7). The cash flow hedge has a fixed GBP/USD exchange rate of 1.5149 (buy approximately $1.5 million and sell £1.0 million monthly) and matures in October 2017.

For the year ended December 31, 2015, the Company earned reduced interest income of $0.1 million and recognized additional interest expense of $4 million, resulting from its cash flow hedging relationships. At December 31, 2015, the Company expects that the hedged forecasted transactions for each of the outstanding qualifying cash flow hedging relationships remain probable of occurring, and as a result, no gains or losses recorded to accumulated other comprehensive income(loss) are expected to be reclassified to earnings. During year ended December 31, 2015, there were no ineffective portions related to outstanding hedges, other than those discussed above.

To illustrate the effect of movements in the interest rate and foreign currency markets, the Company performed a market sensitivity analysis on its outstanding derivative financial instruments. The Company applied various basis point spreads to the underlying interest rate curves and foreign currency exchange rates of the derivative portfolio in order to determine the instruments’ change in fair value. The following table summarizes the results of the analysis performed (dollars in thousands):

		Effects of Change in Interest and
		Foreign Currency Rates
		+50 Basis		−50 Basis		+100 Basis		−100 Basis
Date Entered	Maturity Date	Points		Points		Points		Points
Interest rates:
July 2005	July 2020	$	1,034	$	(933)	$	2,017	$	(1,916)
November 2008	October 2016		102		(96)		201		(195)
July 2012	June 2016		469		(452)		937		(906)
January 2015	October 2017		2,982		(2,916)		5,931		(5,866)
Foreign currency:
July 2012	June 2016		(44)		63		(97)		116
January 2015	October 2017		(95)		246		(265)		417