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Financial Instruments and Fair Value Measurements
 12 Months Ended
Dec. 31, 2015
Fair Value Disclosures [Abstract]  
Financial Instruments and Fair Value Measurements

Note 13—Financial Instruments and Fair Value Measurements

Recurring Fair Value Measurements

Fair value measurement provisions establish a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. These provisions describe three levels of input that may be used to measure fair value:

Level 1: Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.

Level 2: Inputs, other than quoted prices included in Level 1, that are observable for the asset or liability through corroboration with market data at the measurement date.

Level 3: Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

The Company uses observable inputs when available. Fair value is based upon quoted market prices when available. If market prices are not available, the Company may employ internally-developed models that mostly use market-based inputs including yield curves, interest rates, volatilities, and credit curves, among others. The Company limits valuation adjustments to those deemed necessary to ensure that the financial instrument’s fair value adequately represents the price that would be received or paid in the marketplace. Valuation adjustments may include consideration of counterparty credit quality and liquidity as well as other criteria. The estimated fair value amounts are subjective in nature and may involve uncertainties and matters of significant judgment for certain financial instruments. Changes in the underlying assumptions used in estimating fair value could affect the results. The fair value measurement levels are not indicative of risk of investment.

 

The following table summarizes fair value measurements by level at December 31, 2015 and 2014, for assets and liabilities measured at fair value on a recurring basis:

 

(Dollar amounts in thousands)    Level 1      Level 2      Level 3      Total  

December 31, 2015

            

Financial assets:

            

Indemnification assets:

            

Software cost reimbursement

    $ —         $ —         $ —         $ —     

Financial liabilities:

            

Interest rate swap

      —           515         —           515   

December 31, 2014

            

Financial assets:

            

Indemnification assets:

            

Software cost reimbursement

    $ —         $ —         $ 1,428       $ 1,428   

The fair value of financial instruments is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value estimates are made at a specific point in time based on the type of financial instrument and relevant market information. Many of these estimates involve various assumptions and may vary significantly from amounts that could be realized in actual transactions.

For those financial instruments with no quoted market prices available, fair values have been estimated using present value calculations or other valuation techniques, as well as management’s best judgment with respect to current economic conditions, including discount rates and estimates of future cash flows.

Derivative Instruments

The fair value of the Company’s derivative instruments is determined using standard valuation models. The significant inputs used in these models are readily available in public markets, or can be derived from observable market transactions, and therefore have been classified as Level 2. Inputs used in these standard valuation models for derivative instruments include the applicable forward rates, and discount rates. The discount rates are based on the historical LIBOR Swap rates.

Software Indemnification Asset

Indemnification assets included the present value of the expected future cash flows of certain expense reimbursement agreements with Popular. These contracts had termination dates up to September 2015 and were entered into in connection with the merger transaction completed on September 30, 2010 (“the Merger”). Management prepared estimates of the expected reimbursements to be received from Popular until the termination of the contracts, discounted the estimated future cash flows and recorded the indemnification assets as of the Merger closing date. Payments received during the quarters reduced the indemnification asset balance. As of December 31, 2015, the indemnification asset has been fully repaid. For both the years ended December 31, 2014 and 2013, the Company recorded a net unrealized loss of $0.4 million, which are reflected within the other expenses caption in the consolidated statements of income (loss) and comprehensive income (loss). The current portion of the indemnification assets were included within accounts receivable, net and the other long-term portion was included within other long-term assets in the 2014 accompanying consolidated balance sheet. See Note 20 for additional information regarding the expense reimbursement agreements.

 

For indemnification assets a significant increase or decrease in market rates or cash flows could have resulted in a significant change to the fair value. Also, the credit rating and/or the non-performance credit risk of Popular, which is subjective in nature, also could have increased or decreased the sensitivity of the fair value of these assets.

The following table presents the carrying value, as applicable, and estimated fair values for financial instruments at December 31, 2015 and 2014:

 

     December 31,  
     2015      2014  
(Dollar amounts in thousands)    Carrying
Amount		      Fair
Value		      Carrying
Amount		      Fair
Value		  

Financial assets:

            

Indemnification assets:

            

Software cost reimbursement

    $ —         $ —         $ 1,428       $ 1,428   

Financial liabilities:

            

Interst rate swap

    $ 515       $ 515       $ —         $ —     

Senior secured term loan A

      262,323         250,688         277,240         266,400   

Senior secured term loan B

      386,172         373,749         389,340         385,462   

The fair value of the senior secured term loans at December 31, 2015 and 2014 was obtained using the prices provided by third party service providers. Their pricing is based on various inputs such as: market quotes, recent trading activity in a non-active market or imputed prices. Also, the pricing may include the use of an algorithm that could take into account movement in the general high yield market, among other variants.

The senior secured term loans, which are not measured at fair value in the balance sheets, if measured, could be categorized as Level 3 in the fair value hierarchy.

The following table provides a summary of the change in fair value of the Company’s Level 3 assets:

 

(Dollar amounts in thousands)    Indemnification
Assets		  

Balance—December 31, 2012

    $ 6,099   

Payments received

      (2,130 ) 

Unrealized loss recognized in other expenses

      (383 ) 
  

 

 

  

Balance—December 31, 2013

      3,586   

Payments received

      (1,712 ) 

Unrealized loss recognized in other expenses

      (446 ) 
  

 

 

  

Balance—December 31, 2014

      1,428   

Payments received

      (1,442 ) 

Unrealized gain recognized in other expenses

      14   
  

 

 

  

Balance—December 31, 2015

    $ —     
  

 

 

  

There were no transfers in or out of Level 3 during the years ended December 31, 2015, 2014 and 2013.