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Derivative Financial Instruments
 6 Months Ended
Jun. 30, 2015
Derivative Financial Instruments  
Derivative Financial Instruments

 

Note 8 — Derivative Financial Instruments

 

The following is a summary of the derivative financial instruments held by us (dollars in thousands):

 

 

 

 

 

Notional Value

 

 

 

 

 

Fair Value

 

Designation\
Cash Flow

 

Derivative

 

Count

 

June 30,
2015

 

Count

 

December 31,
2014

 

Expiration
Date

 

Balance
Sheet
Location

 

June 30,
2015

 

December 31,
2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Qualifying

 

Basis Swaps

 

—

 

$

—

 

1

 

$
3,000

 

—

 

Other Assets

 

$

—

 

$
2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-Qualifying

 

LIBOR Cap

 

—

 

$

—

 

1

 

$
71,701

 

—

 

Other Assets

 

$

—

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Qualifying

 

LIBOR Cap

 

1

 

$
43,500

 

—

 

$

—

 

2017

 

Other Assets

 

$
15

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Qualifying

 

Interest Rate Swaps

 

6

 

$
115,721

 

12

 

$
250,321

 

2016 - 2017

 

Other Liabilities

 

$
(7,546

)

$
(13,908

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The non-qualifying basis swaps hedges were used to manage our exposure to interest rate movements and other identified risks but do not meet hedge accounting requirements.  We are exposed to changes in the fair value of certain of our fixed rate obligations due to changes in benchmark interest rates and use interest rate swaps to manage our exposure to changes in fair value on these instruments attributable to changes in the benchmark interest rate.  These interest rate swaps designated as fair value hedges involve the receipt of variable-rate amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without the exchange of the underlying notional amount.  During the six months ended June 30, 2015, CDO II was unwound and the related basis swap with a notional value of $3.0 million and a fair value of less than $0.1 million was terminated and recorded as a loss in the first quarter of 2015.  See Note 7 — “Debt Obligations — Collateralized Debt Obligations” for further details.  Also during the six months ended June 30, 2015, a non-qualifying LIBOR cap hedge with a notional value of $71.7 million matured.  We entered into this LIBOR cap hedge in the first quarter of 2014 due to a loan agreement requiring a LIBOR cap of 6%.  During the six months ended June 30, 2014, the notional value on a basis swap decreased by approximately $8.6 million pursuant to the contractual terms of the respective swap agreement.  For the three and six months ended June 30, 2015 and 2014, the change in fair value of the non-qualifying basis swaps and LIBOR caps was less than $(0.1) million and was recorded in interest expense on the consolidated statements of income.

 

The changes in the fair value of qualifying interest rate swap cash flow hedges are recorded in accumulated other comprehensive loss on the consolidated balance sheets.  These interest rate swaps are used to hedge the variable cash flows associated with existing variable-rate debt, and amounts reported in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense as interest payments are made on our variable-rate debt.  During the six months ended June 30, 2015, CDO I and CDO II were unwound and the related interest rate swaps with an aggregate notional value of $134.6 million and an aggregate fair value of $(4.3) million were terminated and recorded as a loss in the first quarter of 2015.  See Note 7 — “Debt Obligations — Collateralized Debt Obligations” for further details.  Also during the six months ended June 30, 2015, we entered into a qualifying LIBOR cap hedge due to a CLO agreement requiring a LIBOR cap of 2%.  During the six months ended June 30, 2014, two interest swaps matured with a combined notional value of approximately $32.0 million.

 

As of June 30, 2015, we expect to reclassify approximately $(5.6) million of other comprehensive loss from qualifying cash flow hedges to interest expense over the next twelve months assuming interest rates on that date are held constant.  These swap agreements must be effective in reducing the variability of cash flows of the hedged items in order to qualify for the aforementioned hedge accounting treatment.  Gains and losses on terminated swaps are being deferred and recognized in earnings over the original life of the hedged item.  As of June 30, 2015 and December 31, 2014, we had a net deferred loss of $0.9 million and $1.1 million, respectively, in accumulated other comprehensive loss related to these terminated swap agreements.  We recorded $0.2 million as additional interest expense related to the amortization of the loss for both the three months ended June 30, 2015 and 2014, and less than $0.1 million and $0.1 million as a reduction to interest expense related to the accretion of the net gains for the three months ended June 30, 2015 and 2014, respectively.  We recorded $0.3 million as additional interest expense related to the amortization of the loss for both the six months ended June 30, 2015 and 2014, and $0.1 million as a reduction to interest expense related to the accretion of the net gains for both the six months ended June 30, 2015 and 2014.  We expect to record approximately $0.5 million of net deferred loss to interest expense over the next twelve months.

 

During the six months ended June 30, 2014, we sold eight remaining  RMBS investments, which were accounted for as linked transactions, with an aggregate carrying value of $65.7 million for approximately $65.8 million and recorded a net gain of $0.1 million related to the settlement of these linked transactions.  The eight RMBS investments were financed with repurchase agreements totaling $55.4 million which were repaid with the proceeds.  For the six months ended June 30, 2014, $0.3 million of net interest income and a less than $0.1 million decrease in fair value was recorded to other income in the consolidated statements of income.

 

In July 2015, CDO III was unwound and the related interest rate swap with a notional value of $7.9 million and a fair value of $0.4 million was terminated and recorded as a loss in the third quarter of 2015.  See Note 7 — “Debt Obligations — Collateralized Debt Obligations” for further details.

 

The following table presents the effect of our derivative financial instruments on the Statements of Income (dollars in thousands):

 

 

 

 

 

Amount of Loss
Recognized in
Other
Comprehensive Loss
(Effective Portion)
For the Six
Months Ended

 

Amount of Loss
Reclassified from
Accumulated Other
Comprehensive Loss
into Interest Expense
(Effective Portion)
For the Six
Months Ended

 

Amount of Loss
Reclassified from
Accumulated Other
Comprehensive Loss
into Loss on
Termination of Swaps
(Ineffective Portion)
For the Six
Months Ended

 

Amount of
Loss Recognized
in Loss on
Termination of Swaps
(Ineffective Portion)
For the Six
Months Ended

 

Amount of
Loss Recognized
in Other Income
For the Six
Months Ended

 

Designation\
Cash Flow

 

Derivative

 

June 30,
2015

 

June 30,
2014

 

June 30,
2015

 

June 30,
2014

 

June 30,
2015

 

June 30,
2014

 

June 30,
2015

 

June 30,
2014

 

June 30,
2015

 

June 30,
2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non- Qualifying

 

Basis Swaps

 

$

—

 

$

—

 

$

—

 

$

—

 

$

—

 

$

—

 

$
(3

)

$

—

 

$

—

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Qualifying

 

Interest Rate Swaps/Cap

 

$
907

 

$
1,078

 

$
(3,242

)

$
(6,555

)

$
(4,286

)

$

—

 

$

—

 

$

—

 

$

—

 

$

—

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non- Qualifying

 

Forward Contracts

 

$

—

 

$

—

 

$

—

 

$

—

 

$

—

 

$

—

 

$

—

 

$

—

 

$

—

 

$
(45

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The cumulative amount of other comprehensive loss related to net unrealized losses on derivatives designated as qualifying hedges as of June 30, 2015 and December 31, 2014 of $(8.4) million and $(15.0) million, respectively, is a combination of the fair value of qualifying cash flow hedges of $(7.5) million and $(13.9) million, respectively, deferred losses on terminated interest rate swaps of $(1.0) million and $(1.2) million, respectively, partially offset by deferred net gains on termination of interest rate swaps of $0.1 million for both periods.

 

We have agreements with certain of our derivative counterparties that contain a provision where if we default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then we could also be declared in default on our derivative obligations.  As of June 30, 2015 and December 31, 2014, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk related to these agreements, was $(7.2) million and $(9.2) million, respectively.  As of June 30, 2015 and December 31, 2014, we had minimum collateral posting thresholds with certain of our derivative counterparties and had posted collateral of $7.7 million and $9.6 million, respectively, which is recorded in other assets in our consolidated balance sheets.