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Derivative Financial Instruments | 9 Months Ended
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Sep. 30, 2015
Derivative Financial Instruments |
Derivative Financial Instruments | NOTE 21. Derivative Financial Instruments The following table summarizes the Company’s outstanding interest-rate and foreign currency swap contracts as of September 30, 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 |  | $ | (6,087) |
November 2008(3) |  | October 2016 |  | Cash Flow |  |  | 5.95 | % | 1 Month LIBOR+1.50% |  | $ | 25,200 |  | $ | (1,063) |
July 2012(4) |  | June 2016 |  | Cash Flow |  |  | 1.81 | % | 1 Month GBP LIBOR+1.20% |  | £ | 137,000 |  | $ | (77) |
January 2015(4) |  | October 2017 |  | Cash Flow |  |  | 1.79 | % | 1 Month GBP LIBOR+0.975% |  | £ | 220,000 |  | $ | (428) |
Foreign currency: |  |  |  |  |  |  |  |  |  |  |  |  |  |
July 2012(5) |  | June 2016 |  | N/A |  | $ | 22,700 |  | Buy USD/Sell GBP |  | £ | 14,500 |  | $ | 835 |
July 2014(6) |  | December 2015 |  | Cash Flow |  | $ | 1,900 |  | Buy USD/Sell GBP |  | £ | 1,100 |  | $ | 212 |
January 2015(7) |  | October 2017 |  | Cash Flow |  | $ | 39,800 |  | Buy USD/Sell GBP |  | £ | 26,300 |  | $ | 72 |
| (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, which hedge fluctuations in interest payments on variable-rate secured debt due to overall changes in hedged cash flows.
| (4) |  | Hedges fluctuations in int erest 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 notes. Represents a currency swap to sell £7.2 million at a rate of 1.5695 on various dates through 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 intercompany loans. Represents a currency swap to sell £0.4 million at a rate of 1.7060 on various dates through December 2015.
| (7) |  | 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 September 30, 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 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. O n 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 GBP interest receipts from a debt investment denominated in GBP. The cash flow hedge has a fixed GBP/USD exchange rate of 1.5695 (buy $11 million and sell £7 million semi-annually) and matures in June 2016. In September 2015, t he Company ceased hedge accounting on this foreign currency swap contract and reclassified $0.4 million from Accumulated Other Comprehensive Loss to Other Income, net, and all future changes in fair value of the foreign currency swap contract will be recognized in earnings. On September 29, 2015, the Company designated £260 million of its GBP-denominated borrowings under the Facility and 2012 term l oan as a hedge of a portion of the Company’s net investments in its GBP-functional subsidiaries to limit exposure to fluctuations in the GBP to U.S. Dollars (“USD”) exchange rate. For instruments that are designated and qualify as net investment hedges, the variability in the foreign currency to USD of the instrument is recorded as a cumulative translation adjustment component of Accumulated Other Comprehensive Income (Loss). Accordingly, changes in value of the designated £260 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 balance of the cumulative translation adjustment will be reclassified to earnings when the hedged investment is sold or substantially liquidated. During the nine months ended September 30, 2015, the Company determined a portion of a cash flow hedge was ineffective and reclassified $0.4 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 at September 30, 2015 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 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 rate: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
July 2005 |  | July 2020 |  | $ | 1,108 |  | $ | (958) |  | $ | 2,142 |  | $ | (1,992) |
November 2008 |  | October 2016 |  |  | 132 |  |  | (131) |  |  | 263 |  |  | (262) |
July 2012 |  | June 2016 |  |  | 802 |  |  | (664) |  |  | 1,546 |  |  | (1,386) |
January 2015 |  | October 2017 |  |  | 3,234 |  |  | (3,650) |  |  | 6,676 |  |  | (7,092) |
Foreign currency: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
July 2012 |  | June 2016 |  |  | (123) |  |  | 96 |  |  | (233) |  |  | 205 |
July 2014 |  | December 2015 |  |  | (9) |  |  | 8 |  |  | (17) |  |  | 16 |
January 2015 |  | October 2017 |  |  | (226) |  |  | 172 |  |  | (424) |  |  | 371 |

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