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Derivative Instruments | 9 Months Ended
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Sep. 30, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments | Derivative Instruments In the normal course of business, our operations are exposed to fluctuations in foreign currency values and interest rate changes. We may seek to control a portion of these risks through a risk management program that includes the use of derivative instruments. The interest and principal payments for Laureate’s senior long-term debt arrangements are to be paid primarily in USD. Our ability to make debt payments is subject to fluctuations in the value of the USD against foreign currencies, since a majority of our operating cash used to make these payments is generated by subsidiaries with functional currencies other than USD. As part of our overall risk management policies, Laureate has at times entered into foreign currency swap contracts and floating-to-fixed interest rate swap contracts. In addition, we occasionally enter into foreign exchange forward contracts to reduce the impact of other non-functional currency-denominated receivables and payables. We do not enter into speculative or leveraged transactions, nor do we hold or issue derivatives for trading purposes. Laureate reports all derivatives at fair value. These contracts are recognized as either assets or liabilities, depending upon the derivative’s fair value. Gains or losses associated with the change in the fair value of these swaps are recognized in our Consolidated Statements of Operations on a current basis over the term of the contracts, unless designated and effective as a hedge. For swaps that are designated and effective as cash flow hedges, gains or losses associated with the change in fair value of the swaps are recognized in our Consolidated Balance Sheets as a component of AOCI and amortized into earnings as a component of Interest expense over the term of the related hedged items. Upon early termination of an effective interest rate swap designated as a cash flow hedge, unrealized gains or losses are deferred in our Consolidated Balance Sheets as a component of AOCI and are amortized as an adjustment to Interest expense over the period during which the hedged forecasted transaction affects earnings. For derivatives that are both designated and effective as net investment hedges, gains or losses associated with the change in fair value of the derivatives are recognized on our Consolidated Balance Sheets as a component of AOCI. The reported fair values of our derivatives, which are classified in Prepaid expenses and other current assets and Derivative instruments on our Consolidated Balance Sheets, were as follows:
| September 30, 2019 |  | December 31, 2018
Derivatives designated as hedging instruments: |  |  |
Long-term assets: |  |  |
Net investment cross currency swaps | $ | — |  |  | $ | 3,259 |
Derivatives not designated as hedging instruments: |  |  |
Current assets: |  |  |
Cross currency swaps | 295 |  |  | — |
Current liabilities: |  |  |
Cross currency swaps | 11 |  |  | 4,021 |
Long-term liabilities: |  |  |
Cross currency and interest rate swaps | — |  |  | 6,656 |
Total derivative instrument assets | $ | 295 |  |  | $ | 3,259 |
Total derivative instrument liabilities | $ | 11 |  |  | $ | 10,677 |
Derivatives Designated as Hedging Instruments Cash Flow Hedge - 2024 Term Loan Interest Rate Swaps In May 2017, Laureate entered into, and designated as cash flow hedges, four pay-fixed, receive-floating amortizing interest rate swaps with notional amounts of $100,000, $100,000, $200,000 and $300,000, respectively. These notional amounts matched the corresponding principal of the 2024 Term Loan borrowings of which these swaps were effectively hedging the interest payments. As such, the notional values amortized annually based on the terms of the agreements to match the principal borrowings as they were repaid. These swaps effectively fixed the floating interest rate on the term loan to reduce exposure to variability in cash flows attributable to changes in the USD-LIBOR-BBA swap rate. All four swaps were fully settled on August 21, 2018, prior to their May 31, 2022 maturity date, with the remaining AOCI to be ratably reclassified into income through Interest expense over the remaining maturity period of the 2024 Term Loans. The cash received at settlement from the swap counterparties was $14,117. During the second quarter of 2019, the Company accelerated the reclassification of amounts in AOCI to earnings as a result of the hedged forecasted transactions becoming probable not to occur, due to the full repayment of the 2024 Term Loan in June 2019 using proceeds from the sale of our institutions in Portugal and Spain. The accelerated amounts were a gain of approximately $9,800 and were recorded as a decrease to Interest expense. Prior to settlement of the swaps, they were determined to be 100% effective; therefore, the amount of gain or loss recognized in income on the ineffective portion was $0. Net Investment Hedge - Cross Currency Swaps In December 2017, Laureate entered into two EUR-USD cross currency swaps (net investment hedges) to hedge the foreign currency exchange volatility on operations of our Euro functional currency subsidiaries and better match our cash flows with the currencies in which our debt obligations are denominated. Both swaps had an effective date of December 22, 2017 and a maturity date of November 2, 2020, and were designated at inception as effective net investment hedges. In April 2019, the Company terminated both EUR-USD cross currency swaps for a net settlement received of $7,679, which is included in Settlement of derivatives related to sale of discontinued operations and net investment hedge on our consolidated statement of cash flows. The terms of the swaps specified that at maturity on the first swap, Laureate would deliver the notional amount of EUR 50,000 and receive USD $59,210 at an implied exchange rate of 1.1842 and at maturity on the second swap, Laureate would deliver the notional amount of EUR 50,000 and receive USD $59,360 at an implied exchange rate of 1.1872. Semiannually until maturity, Laureate was obligated to pay 5.63% and receive 8.25% on EUR 50,000 and USD $59,210, respectively, on the first swap and pay 5.6675% and receive 8.25% on EUR 50,000 and USD $59,360, respectively, on the second swap. The swaps were determined to be 100% effective; therefore, the amount of gain or loss recognized in income on the ineffective portion of derivative instruments designated as hedging instruments was $0. The accumulated gain recognized in AOCI will be deferred from earnings until the sale or liquidation of the hedged investee. As of December 31, 2018, these swaps had an estimated fair value of $3,259, which was recorded in Derivative Instruments as a long-term asset. The table below shows the total recorded unrealized (loss) gain in Comprehensive income for the derivatives designated as hedging instruments. The impact of these derivative instruments on Comprehensive income, Interest expense and AOCI were as follows: For the three months ended September 30:
| (Loss) Gain Recognized in Comprehensive Income (Effective Portion) | Income Statement Location |  | Gain Reclassified from AOCI to Income (Effective Portion) | Total Consolidated Interest Expense
| 2019 |  | 2018 |  |  |  | 2019 |  | 2018 |  | 2019 | 2018
Cash flow hedge |  |  |
Interest rate swaps | $ | — |  |  | $ | (1,938 | ) |  | Interest expense |  | $ | — |  |  | $ | 950 |  |  |  |
Net investment hedge |  |  |
Cross currency swaps | — |  |  | 1,378 |  |  | N/A |  | — |  |  | — |  |  |  |
Total | $ | — |  |  | $ | (560 | ) |  |  |  | $ | — |  |  | $ | 950 |  |  | $ | (40,319 | ) | $ | (58,319 | )
For the nine months ended September 30:
| (Loss) Gain Recognized in Comprehensive Income (Effective Portion) | Income Statement Location |  | Gain Reclassified from AOCI to Income (Effective Portion) | Total Consolidated Interest Expense
| 2019 |  | 2018 |  |  |  | 2019 |  | 2018 |  | 2019 | 2018
Cash flow hedge |  |  |
Interest rate swaps | $ | (11,818 | ) |  | $ | 7,307 |  |  | Interest expense |  | $ | 11,818 |  |  | $ | 912 |  |  |  |
Net investment hedge |  |  |
Cross currency swaps | 3,868 |  |  | 4,469 |  |  | N/A |  | — |  |  | — |  |  |  |
Total | $ | (7,950 | ) |  | $ | 11,776 |  |  |  |  | $ | 11,818 |  |  | $ | 912 |  |  | $ | (136,438 | ) | $ | (181,746 | )
Derivatives Not Designated as Hedging Instruments MXN to USD Foreign Currency Swaps In September 2019, Laureate entered into three MXN to USD swap agreements with a combined notional amount of MXN 453,146. During the fourth quarter of 2019, Laureate will deliver the notional amount and receive USD $23,000 at a rate of exchange of 0.0508. As of September 30, 2019, these swaps had an estimated value of $295 which was recorded in Prepaid expenses and other current assets. These swaps were not designated as hedges for accounting purposes. AUD to USD Foreign Currency Swaps In September 2019, Laureate entered into two AUD to USD swap agreements with a combined notional amount of AUD 11,000. During the fourth quarter ended 2019, Laureate will receive the notional amount and deliver USD $7,443 at a rate of exchange of 0.6766 USD per 1 AUD. As of September 30, 2019, these swaps had an estimated value of $11 which was recorded in Derivative instruments as a current liability. These swaps were not designated as hedges for accounting purposes. EUR to USD Foreign Currency Swaps - Spain and Portugal As disclosed in the 2018 Form 10-K, in December 2018, Laureate entered into two EUR to USD swap agreements in connection with the signing of the sale agreement for the subsidiaries in Spain and Portugal. The purpose of the swaps was to mitigate the risk of foreign currency exposure on the sale proceeds. The first swap was deal contingent, with the settlement date occurring on the second business day following the completion of the sale. On the settlement date, Laureate delivered the notional amount of EUR 275,000 and received USD $314,573 at a rate of exchange of 1.1439, which resulted in a realized gain of $5,088. The second swap was a put/call option with a maturity date of April 8, 2019, where Laureate could put the notional amount of EUR 275,000 and call the USD amount of $310,750 at an exchange rate of 1.13. Based on expected timing of the sale transaction, the swap was terminated on April 2, 2019, resulting in a payment to the counterparty of $980 that included a deferred premium payment net of proceeds received. The realized gain of $5,088 and the payment of $980 are included in Settlement of derivatives related to sale of discontinued operations and net investment hedge in the consolidated statement of cash flows. As of December 31, 2018, these swaps had an aggregate estimated fair value of $4,021, which was recorded in Derivative instruments as a current liability through a charge to unrealized loss on derivatives. These swaps were not designated as hedges for accounting purposes. In addition to the swaps above, in order to continue to mitigate the risk of foreign currency exposure on the expected sale proceeds for Spain and Portugal in advance of the May 31, 2019 sale closing date, in April 2019, Laureate also entered into seven EUR to USD swap agreements with a combined notional amount of EUR 375,000. On the maturity date of May 15, 2019, Laureate paid the EUR notional amount and received a combined total of USD $423,003 at a rate of exchange of 1.128007, resulting in a gain of $1,644. In May 2019, Laureate entered into nine EUR to USD swap agreements with a combined notional amount of EUR 532,000. On the maturity date of June 4, 2019, Laureate paid the EUR notional amount and received a combined total of $597,149 at a rate of exchange of 1.122461, resulting in a realized loss of approximately $565. The realized gain of $1,644 and the realized loss of $565 are included in Settlement of derivatives related to sale of discontinued operations and net investment hedge on the consolidated statement of cash flows. These swaps were not designated as hedges for accounting purposes. CLP to Unidad de Fomento (UF) Cross Currency and Interest Rate Swaps The cross currency and interest rate swap agreements are intended to provide a better correlation between our debt obligations and operating currencies. In 2010, one of our subsidiaries in Chile entered into four cross currency and interest rate swap agreements with an aggregate notional amount of approximately $31,000, and convert CLP-denominated, floating-rate debt to fixed-rate UF-denominated debt. The UF is a Chilean inflation-adjusted unit of account. One of the swaps was scheduled to mature on December 1, 2024, and the remaining three were scheduled to mature on July 1, 2025 (the CLP to UF cross currency and interest rate swaps); however, during the first quarter 2019, the Company elected to settle all four swaps for a net cash payment of approximately USD $8,200. In addition, Chile also elected to repay a portion of the principal balance outstanding for certain notes payable, as discussed in Note 9, Debt. This payment is included in (Payments for) proceeds from settlement of derivative contracts on the consolidated statement of cash flows. The CLP to UF cross currency and interest rate swaps were not designated as hedges for accounting purposes. As of December 31, 2018, these swaps had an estimated fair value of $6,656 which was recorded in Derivative instruments as a long-term liability. EUR to USD Foreign Currency Swaps - Cyprus and Italy As disclosed in the 2018 Form 10-K, in December 2017, the Company entered into a total of six EUR to USD forward exchange swap agreements in connection with the sale of its institutions in Cyprus and Italy. The purpose of the swaps was to mitigate the risk of foreign currency exposure on the sale proceeds. The swaps had an aggregate notional amount of EUR 200,000 and matured on January 16, 2018, resulting in a total realized loss on derivatives of $9,960, which was included in Settlement of derivatives related to sale of discontinued operations and net investment hedge on the consolidated statement of cash flows for the nine months ended September 30, 2018. The swaps were not designated as hedges for accounting purposes. Derivatives related to Series A Preferred Stock Offering As disclosed in the 2018 Form 10-K, in December 2016 and January 2017, the Company issued shares of convertible redeemable preferred stock (the Series A Preferred Stock) and identified several embedded derivatives related to certain contingent redemption features of the Series A Preferred Stock. These derivatives were not designated as hedges for accounting purposes and therefore the changes in estimated fair value were recognized as a component of earnings. The Series A Preferred Stock was converted into Class A common stock on April 23, 2018. The estimated fair value of these derivatives at the conversion date was approximately $140,300; accordingly, the derivative assets were recorded at their estimated fair values through a corresponding gain on derivatives, a component of non-operating income. The increase in the fair value of the derivatives can be attributed to the use of the Monte Carlo Simulation Method to value the derivatives prior to the April 23, 2018 conversion date, when the probability of conversion increased to 100% and the valuation inputs became definitive. In connection with the conversion of the Series A Preferred Stock into Class A common stock, the carrying value of the derivative assets was reclassified into equity in April 2018. Components of the reported Gain on derivatives not designated as hedging instruments in the Consolidated Statements of Operations were as follows:
| For the three months ended September 30, |  | For the nine months ended September 30,
| 2019 |  | 2018 |  | 2019 |  | 2018
Unrealized Gain (Loss) |  |  |  |  |  |  |
Contingent redemption features - Series A Preferred Stock | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (42,140 | )
Cross currency and interest rate swaps | 284 |  |  | 33 |  |  | 4,305 |  |  | 4,391 |
Interest rate swaps | — |  |  | 36 |  |  | — |  |  | 138 |
| 284 |  |  | 69 |  |  | 4,305 |  |  | (37,611 | )
Realized (Loss) Gain |  |  |  |  |  |  |
Contingent redemption features - Series A Preferred Stock | — |  |  | — |  |  | — |  |  | 140,320 |
Cross currency and interest rate swaps | — |  |  | (213 | ) |  | 3,794 |  |  | (10,597 | )
| — |  |  | (213 | ) |  | 3,794 |  |  | 129,723 |
Total Gain (Loss) |  |  |  |  |  |  |
Contingent redemption features - Series A Preferred Stock | — |  |  | — |  |  | — |  |  | 98,180 |
Cross currency and interest rate swaps | 284 |  |  | (180 | ) |  | 8,099 |  |  | (6,206 | )
Interest rate swaps | — |  |  | 36 |  |  | — |  |  | 138 |
Gain (loss) on derivatives, net | $ | 284 |  |  | $ | (144 | ) |  | $ | 8,099 |  |  | $ | 92,112 |
Credit Risk and Credit-Risk-Related Contingent Features Laureate’s derivatives expose us to credit risk to the extent that the counterparty may possibly fail to perform its contractual obligation. The amount of our credit risk exposure is equal to the fair value of the derivative when any of the derivatives are in a net gain position. As of September 30, 2019 and December 31, 2018, the estimated fair values of derivatives in a gain position were $295 and $3,259, respectively. Laureate has limited its credit risk by only entering into derivative transactions with highly rated major financial institutions. We have not entered into collateral agreements with our derivatives' counterparties. At September 30, 2019, one institution was rated A1 and one institution as rated A2 by the global rating agency of Moody's Investors Service. These financial institutions accounted for all of Laureate's derivative credit risk exposure. Laureate's agreements with its derivative counterparties contain a provision under which we could be declared in default on our derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to a default on the indebtedness. As of September 30, 2019 and December 31, 2018, we had not breached any default provisions and had not posted any collateral related to these agreements. If we had breached any of these provisions, we could have been required to settle the obligations under the derivative agreements for an amount that we believe would approximate their estimated fair value of $11 as of September 30, 2019 and $10,677 as of December 31, 2018.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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