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Derivative Financial Instruments
 3 Months Ended
Mar. 31, 2015
Derivative Financial Instruments  
Derivative Financial Instruments

NOTE 20.  Derivative Financial Instruments

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedge

 

Rate/Buy

 

Floating/Exchange

 

Notional/

 

 

 

Date Entered

 

Maturity Date

 

Designation

 

Amount

  

Rate Index

 

Sell Amount

 

Fair Value(1)

 

Interest rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 2005(2) 

 

July 2020

 

Cash Flow

 

 
3.82 

%

BMA Swap Index

 

$
45,600 

 

$
(6,129)

 

November 2008(3) 

 

October 2016

 

Cash Flow

 

 
5.95 

%

1 Month LIBOR+1.50%

 

$
25,600 

 

$
(1,540)

 

July 2012(3)

 

June 2016

 

Cash Flow

 

 
1.81 

%

1 Month GBP LIBOR+1.20%

 

£
137,000 

 

$
(84)

 

January 2015(3)

 

October 2017

 

Cash Flow

 

 
1.79 

%

1 Month GBP LIBOR+0.975%

 

£
220,000 

 

$
(67)

 

Foreign currency:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 2012(4)

 

June 2016

 

Cash Flow

 

$
34,100 

 

Buy USD/Sell GBP

 

£
21,700 

 

$
1,887 

 

July 2014(5)

 

December 2015

 

Cash Flow

 

$
5,600 

 

Buy USD/Sell GBP

 

£
3,300 

 

$
732 

 

January 2015(6)

 

October 2017

 

Cash Flow

 

$
49,300 

 

Buy USD/Sell GBP

 

£
32,500 

 

$
983 

 

(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)

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

(4)

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 1.5695 on various dates through June 2016.

(5)

Currency swap contract (buy USD/sell GBP) hedges the foreign currency exchange risk related to the Company’s forecasted GBP denominated interest receipts on intercompany loans. Represents a currency swap to sell £0.4 million at a rate of 1.7060 on various dates through December 2015.

(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 March 31, 2015, the Company does not anticipate non-performance by the counterparties to its outstanding derivative contracts.

 

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 additional discussion of the Term Loan in Note 11). The cash flow hedge has a notional amount of £220 million and expires 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 GBP interest receipts on the Company’s HC-One Facility (see additional discussion of the HC-One Facility in 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.

 

During the three months ended March 31, 2015, the Company determined a portion of a cash flow hedge was ineffective and reclassified $0.1 million of unrealized gains related to this interest-rate swap contract into other income, net. 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 additional gains or losses recorded to accumulated other comprehensive loss are expected to be reclassified to earnings for any other outstanding hedges, other than 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 hedging 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 rate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 2005

 

July 2020

 

$
1,082 

 

$
(1,184)

 

$
2,215 

 

$
(2,317)

 

November 2008

 

October 2016

 

 
200 

 

 
(190)

 

 
396 

 

 
(386)

 

July 2012

 

June 2016

 

 
1,242 

 

 
(1,205)

 

 
2,466 

 

 
(2,429)

 

January 2015

 

October 2017

 

 
4,165 

 

 
(4,180)

 

 
8,338 

 

 
(8,353)

 

Foreign currency:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

July 2012

 

June 2016

 

 
1,745 

 

 
2,067 

 

 
1,584 

 

 
2,228 

 

July 2014

 

December 2015

 

 
711 

 

 
760 

 

 
687 

 

 
784 

 

January 2015

 

October 2017

 

 
831 

 

 
1,313 

 

 
590 

 

 
1,554