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Derivative Financial Instruments | 3 Months Ended
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Mar. 31, 2016
Derivative Financial Instruments |
Derivative Financial Instruments | NOTE 19. Derivative Financial Instruments The following table summarizes the Company’s outstanding interest-rate and foreign currency swap contracts as of March 31, 2016 (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 |  | $ | (5,487) |
November 2008(3) |  | October 2016 |  | Cash Flow |  |  | 5.95 | % | 1 Month LIBOR+1.50% |  | $ | 24,900 |  | $ | (532) |
July 2012(4) |  | June 2016 |  | Cash Flow |  |  | 1.81 | % | 1 Month GBP LIBOR+1.20% |  | £ | 137,000 |  | $ | (29) |
January 2015(4) |  | October 2017 |  | Cash Flow |  |  | 1.79 | % | 1 Month GBP LIBOR+0.975% |  | £ | 220,000 |  | $ | (1,336) |
Foreign currency: |  |  |  |  |  |  |  |  |  |  |  |  |  |
July 2012(5) |  | June 2016 |  | N/A |  | $ | 11,400 |  | Buy USD/Sell GBP |  | £ | 7,200 |  | $ | 964 |
January 2015(6) |  | October 2017 |  | Cash Flow |  | $ | 30,300 |  | Buy USD/Sell GBP |  | £ | 20,000 |  | $ | 1,505 |
| (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 hedges fluctuations 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 British pound sterling (“GBP”) denominated senior notes. Represents a currency swap to sell £7.2 million at a rate of 1.5695 in 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 March 31, 2016, the Company does not anticipate non-performance by the counterparties to its outstanding derivative contracts. During the three months ended March 31, 2016, 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 at March 31, 2016 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 |  | $ | 1,066 |  | $ | (773) |  | $ | 1,986 |  | $ | (1,692) |
November 2008 |  | October 2016 |  |  | 67 |  |  | (68) |  |  | 135 |  |  | (135) |
July 2012 |  | June 2016 |  |  | 209 |  |  | (200) |  |  | 417 |  |  | (401) |
January 2015 |  | October 2017 |  |  | 2,486 |  |  | (2,494) |  |  | 4,976 |  |  | (4,984) |
Foreign currency: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
July 2012 |  | June 2016 |  |  | (47) |  |  | 57 |  |  | (99) |  |  | 109 |
January 2015 |  | October 2017 |  |  | (72) |  |  | 216 |  |  | (215) |  |  | 360 |

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