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Financial Instruments, Hedging Activities and Fair Value Measurements

9 Months Ended

Sep. 30, 2019

Financial Instruments, Hedging Activities and Fair Value Measurements

FINANCIAL INSTRUMENTS, HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENTS

Fair value of financial instruments

Equity securities with readily determinable fair values - Balances of equity securities are recorded within other assets, with any changes in fair value recorded within other expense, net. The fair values of equity securities are based upon quoted market prices, which are considered Level 1 inputs.

Long-term borrowings - The estimated fair values of these borrowings are based on recent trades, as reported by a third-party pricing service. Due to the infrequency of trades, these inputs are considered to be Level 2 inputs.

Derivative instruments - The Company’s interest rate caps, interest rate swaps and cross-currency swaps are valued using broker quotations, or market transactions in either the listed or over-the-counter markets. As such, these derivative instruments are included in the Level 2 hierarchy.

The table below presents the fair values of our financial instruments measured on a recurring basis by level within the fair value hierarchy at September 30, 2019 and December 31, 2018.



	September 30, 2019								December 31, 2018
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Prepaid expenses and other current assets:
Interest rate caps ⁽¹⁾	$	—	$	—	$	—	$	—	$	—	$	4.5	$	—	$	4.5
Cross-currency swaps ⁽²⁾	—		14.6		—		14.6		—		14.1		—		14.1
Other assets:
Interest rate caps ⁽¹⁾	—		—		—		—		—		1.4		—		1.4
Cross-currency swaps ⁽²⁾	—		18.8		—		18.8		—		—		—		—
Investments in equity securities	0.6		—		—		0.6		0.7		—		—		0.7
Liabilities:
Other accrued liabilities:
Interest rate caps ⁽¹⁾	—		1.0		—		1.0		—		—		—		—
Interest rate swaps ⁽¹⁾	—		7.6		—		7.6		—		—		—		—
Other liabilities:
Interest rate caps ⁽¹⁾	—		1.6		—		1.6		—		—		—		—
Interest rate swaps ⁽¹⁾	—		27.3		—		27.3		—		2.9		—		2.9
Cross-currency swaps ⁽²⁾	—		—		—		—		—		8.8		—		8.8
Long-term borrowings:
2024 Dollar Senior Notes	—		520.3		—		520.3		—		474.9		—		474.9
2024 Euro Senior Notes	—		378.1		—		378.1		—		381.1		—		381.1
2025 Euro Senior Notes	—		509.1		—		509.1		—		497.5		—		497.5
2024 Dollar Term Loans	—		2,396.5		—		2,396.5		—		2,276.1		—		2,276.1

(1) Cash flow hedge

(2) Net investment hedge

Derivative Financial Instruments

We selectively use derivative instruments to reduce market risk associated with changes in foreign currency exchange rates and interest rates. The use of derivatives is intended for hedging purposes only, and we do not enter into derivative instruments for speculative purposes. A description of each type of derivative used to manage risk is included in the following paragraphs.

Derivative Instruments Qualifying and Designated as Cash Flow and Net Investment Hedges

Interest Rate Caps Designated as Cash Flow Hedges

During the year ended December 31, 2017, we entered into four 1.5% interest rate caps with aggregate notional amounts totaling $850.0 million to hedge the variable interest rate exposures on our 2024 Dollar Term Loans. Three of these interest rate caps, comprising $600.0 million of the notional value, expire December 31, 2019 and had a deferred premium of $8.6 million at inception. The fourth interest rate cap, comprising the remaining $250.0 million of the notional value, expires December 31, 2021 and had a deferred premium of $8.1 million at inception. All deferred premiums are paid quarterly over the term of the respective interest rate caps. These interest rate caps are marked to market at each reporting date and any unrealized gains or losses are included in accumulated other comprehensive loss ("AOCI") and reclassified to interest expense in the same period or periods during which the hedged transactions affect earnings.

Interest Rate Swaps Designated as Cash Flow Hedges

During the three months ended June 30, 2018, we entered into three interest rate swaps with aggregate notional amounts totaling $475.0 million to hedge interest rate exposures related to variable rate borrowings under the 2024 Dollar Term Loans. Under the terms of the interest rate swap agreements, the Company is required to pay the counter-parties a stream of fixed interest payments at a rate of 2.72% and in turn, receives variable interest payments based on 3-month LIBOR from the counter-parties. The interest rate swaps are designated as cash flow hedges and expire on March 31, 2023. These interest rate swaps are marked to market at each reporting date and any unrealized gains or losses are included in AOCI and reclassified to interest expense in the same period or periods during which the hedged transactions affect earnings.

During the three months ended March 31, 2019, we entered into two interest rate swaps with aggregate notional amounts totaling $500.0 million, effective December 31, 2019, to hedge interest rate exposure associated with the 2024 Dollar Term Loans. Under the terms of the interest rate swap agreements, the Company is required to pay the counter-parties a stream of fixed interest payments at a rate of 2.59% and in turn, receives variable interest payments based on 3-month LIBOR from the counter-parties. The interest rate swaps are designated as cash flow hedges and expire on December 31, 2022. These interest rate swaps are marked to market at each reporting date and any unrealized gains or losses are included in AOCI and reclassified to interest expense in the same period or periods during which the hedged transactions affect earnings.

Cross-Currency Swaps Designated as Net Investment Hedges

During the three months ended June 30, 2018, we entered into three fixed-for-fixed cross-currency swaps with aggregate notional amounts totaling $475.0 million to hedge the variability of exchange rate impacts between the U.S. Dollar and Euro. Under the terms of the cross-currency swap agreements, the Company has notionally exchanged $475.0 million at a weighted average interest rate of 4.47% for €387.2 million at a weighted average interest rate of 1.95%. The cross-currency swaps are designated as net investment hedges and expire on March 31, 2023. These cross-currency swaps are marked to market at each reporting date and any unrealized gains or losses are included in unrealized currency translation adjustments, within AOCI.

During the three months ended December 31, 2018, we settled three fixed-for-fixed cross-currency swaps previously executed in 2018 resulting in cash proceeds of $22.5 million. Concurrently, we notionally exchanged $475.0 million at a weighted average interest rate of 4.47% for €416.6 million at a weighted average interest rate of 1.44%. The cross-currency swaps are designated as net investment hedges and expire on March 31, 2023. These cross-currency swaps are marked to market at each reporting date and any unrealized gains or losses are included in unrealized currency translation adjustments, within AOCI.

The following table presents the gains (losses) included in AOCI for derivative instruments that qualify and have been designated as cash flow and net investment hedges:



	September 30, 2019			December 31, 2018
AOCI:
Interest rate caps (cash flow hedges)	$	4.3		$	(3.4	)
Interest rate swaps (cash flow hedges)	34.9			3.0
Cross-currency swaps (net investment hedges)	(33.3		)	(27.7		)
Total AOCI	$	5.9		$	(28.1	)

Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis.

The following tables set forth the locations and amounts recognized during the three and nine months ended September 30, 2019 and 2018 for these cash flow and net investment hedges.



		For the Three Months Ended September 30,
		2019						2018
Derivatives in Cash Flow and Net Investment Hedges	Location of (Gain) Loss Recognized in Income on Derivatives	Net Amount of (Gain) Loss Recognized in OCI on Derivatives			Amount of (Gain) Loss Recognized in Income			Net Amount of (Gain) Loss Recognized in OCI on Derivatives			Amount of (Gain) Loss Recognized in Income
Interest rate caps	Interest expense, net	$	0.3		$	0.1		$	(1.1	)	$	(0.7	)
Interest rate swaps	Interest expense, net	4.8			0.4			(2.5		)	0.5
Cross-currency swaps	Interest expense, net	(24.2		)	(3.8		)	5.5			(3.2		)



		For the Nine Months Ended September 30,
		2019						2018
Derivatives in Cash Flow and Net Investment Hedges	Location of (Gain) Loss Recognized in Income on Derivatives	Net Amount of (Gain) Loss Recognized in OCI on Derivatives			Amount of (Gain) Loss Recognized in Income			Net Amount of (Gain) Loss Recognized in OCI on Derivatives			Amount of (Gain) Loss Recognized in Income
Interest rate caps	Interest expense, net	$	6.2		$	(1.5	)	$	(11.5	)	$	(1.4	)
Interest rate swaps	Interest expense, net	32.4			0.5			(5.0		)	0.9
Cross-currency swaps	Interest expense, net	(39.1		)	(11.0		)	(18.4		)	(5.9		)

Over the next 12 months, we expect losses of $9.9 million pertaining to cash flow hedges to be reclassified from AOCI into earnings, related to our interest rate caps and interest rate swaps.

Derivative Instruments Not Designated as Cash Flow Hedges

We periodically enter into foreign currency forward and option contracts to reduce market risk and hedge our balance sheet exposures and cash flows for subsidiaries with exposures denominated in currencies different from the functional currency of the relevant subsidiary. These contracts have not been designated as hedges and all gains and losses are marked to market through other income, net in the condensed consolidated statement of operations.

During the year ended December 31, 2017, we purchased a 1.25% interest rate cap with a notional amount of €388.0 million to hedge the variable interest rate exposures on our 2023 Euro Term Loans. We paid a premium equal to $0.6 million for the interest rate cap which is effective through December 31, 2019. Changes in the fair value of the derivative instrument are recorded in current period earnings and are included in interest expense. The fair value of this interest rate cap at September 30, 2019 was zero.

Fair value gains and losses of derivative contracts, as determined using Level 2 inputs, that have not been designated for hedge accounting treatment are recorded in earnings as follows:



Derivatives Not Designated as Hedging Instruments under ASC 815	Location of (Gain) Loss Recognized in Income on Derivatives	Three Months Ended September 30,					Nine Months Ended September 30,
	Location of (Gain) Loss Recognized in Income on Derivatives	2019		2018			2019		2018
Foreign currency forward contracts	Other (income) expense, net	$	2.3	$	(3.0	)	$	4.1	$	(7.6	)

- 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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