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INTEREST RATE SWAP AGREEMENTS
 12 Months Ended
Dec. 31, 2014
INTEREST RATE SWAP AGREEMENTS  
INTEREST RATE SWAP AGREEMENTS

 

12 - INTEREST RATE SWAP AGREEMENTS

 

As of March 31, 2014, the Company was in default under covenants of its 2007 Credit Facility due to the default on the scheduled debt amortization payment due on March 31, 2014. Refer to Note 1 — General Information for additional information regarding defaults relating to the swap.  The default under the 2007 Credit Facility required the Company to elect interest periods of only one-month, therefore the Company no longer qualified for hedge accounting under the original designation and hedge accounting was terminated effective March 31, 2014.  Additionally, the filing of the Chapter 11 Cases by the Company on the Petition Date constituted an event of default with respect to the outstanding interest rate swap with DNB Bank ASA.  As a result, DNB Bank ASA terminated all transactions under the remaining swap agreement effective April 30, 2014 and filed a secured claim with the Bankruptcy Court of $5,622. The claim was paid to DNB Bank ASA by the Successor Company during the period from July 9 to December 31, 2014.

 

As of December 31, 2013, the Company had four interest rate swap agreements outstanding with DnB Bank ASA to manage interest costs and the risk associated with changing interest rates related to the Company’s 2007 Credit Facility.  The total notional principal amount of the swaps at December 31, 2013 is $306,233 and the swaps had specified rates and durations.  Three of the swaps that were outstanding as of December 31, 2013 expired during 2014 prior to the Petition Date.

 

The swap agreements held by the Predecessor Company synthetically converted variable rate debt to fixed rate debt at the fixed interest rate of the swap plus the Applicable Margin, as defined in the “2007 Credit Facility” section above in Note 10 — Debt.

 

The following table summarizes the interest rate swaps designated as cash flow hedges that were in place as of December 31, 2013 for the Predecessor Company:

 

 

 

Predecessor

 

 

 

December 31,
2013

 

Interest Rate Swap Detail

 

Notional

 

Trade

 

Fixed

 

Start Date

 

End date

 

Amount

 

Date

 

Rate

 

of Swap

 

of Swap

 

Outstanding

 

9/6/05

 
4.485 

%

9/14/05

 

7/29/15

 

$
106,233 

 

3/29/06

 
5.25 

%

1/2/07

 

1/1/14

 
50,000 

 

1/9/09

 
2.05 

%

1/22/09

 

1/22/14

 
100,000 

 

2/11/09

 
2.45 

%

2/23/09

 

2/23/14

 
50,000 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$
306,233 

 

 

The following table summarizes the derivative asset and liability balances at December 31, 2013 for the Predecessor Company:

 

 

 

Liability Derivatives

 

 

 

Balance

 

Fair Value

 

Balance

 

Fair Value

 

 

 

Sheet
Location

 

December
31, 2013

 

Sheet
Location

 

December 31,
2013

 

Derivatives designated as hedging instruments

 

 

 

 

 

 

 

 

 

Interest rate contracts

 

Fair value of derivative instruments (Current Assets)

 

$

—

 

Fair value of derivative instruments (Current Liabilities)

 

$
6,975 

 

Interest rate contracts

 

Fair value of derivative instruments (Noncurrent Assets)

 

—

 

Fair value of derivative instruments (Noncurrent Liabilities)

 

—

 

 

 

 

 

 

 

 

 

 

 

Total derivatives designated as hedging instruments 

 

 

 

—

 

 

 
6,975 

 

 

 

 

 

 

 

 

 

 

 

Total Derivatives 

 

 

 

$

—

 

 

 

$
6,975 

 

 

The differentials to be paid or received for these swap agreements were recognized as an adjustment to Interest expense as incurred.  The Company utilized cash flow hedge accounting for these swaps through March 31, 2014, whereby the effective portion of the change in value of the swaps was reflected as a component of AOCI.  The ineffective portion is recognized as Other expense, which is a component of Other (expense) income.  On March 31, 2014, the cash flow hedge accounting on the remaining swap agreement was discontinued.  Once cash flow hedge accounting was discontinued, the changes in the fair value of the interest rate swaps were recorded in the Consolidated Statement of Operations in Interest expense and the remaining amounts included in AOCI were amortized to interest expense over the original term of the hedging relationship for the Predecessor Company.

 

The interest expense pertaining to the interest rate swaps for the Predecessor Company for the period from January 1 to July 9, 2014 and the years ended December 31, 2013 and 2012 was $2,580, $9,963 and $13,440, respectively.

 

The following tables present the impact of derivative instruments and their location within the Consolidated Statement of Operations for the Predecessor Company:

 

The Effect of Derivative Instruments on the Consolidated Statement of Operations

For the Period from January 1 to July 9, 2014

 

Derivatives in Cash
Flow Hedging

 

Amount of
Gain (Loss)
Recognized
in AOCI on
Derivative
(Effective
Portion)

 

Location of
Gain (Loss)
Reclassified
from AOCI
into income
(Effective

 

Amount of
Gain (Loss)
Reclassified
from AOCI
into income
(Effective
Portion)

 

Location of
Gain (Loss)
Recognized in
Income on
Derivative
(Ineffective

 

Amount of
Gain (Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion)

 

Relationships

 

2014

 

Portion)

 

2014

 

Portion)

 

2014

 

Interest rate contracts

 

$
(179

)

Interest Expense

 

$
(2,580

)

Other Income (Expense)

 

$

—

 

 

The Effect of Derivative Instruments on the Consolidated Statement of Operations

For the Year Ended December 31, 2013

 

Derivatives in Cash
Flow Hedging

 

Amount of
Gain (Loss)
Recognized
in AOCI on
Derivative
(Effective
Portion)

 

Location of
Gain (Loss)
Reclassified
from AOCI
into income
(Effective

 

Amount of
Gain (Loss)
Reclassified
from AOCI
into income
(Effective
Portion)

 

Location of
Gain (Loss)
Recognized in
Income on
Derivative
(Ineffective

 

Amount of
Gain (Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion)

 

Relationships

 

2013

 

Portion)

 

2013

 

Portion)

 

2013

 

Interest rate contracts

 

$
(882

)

Interest Expense

 

$
(9,963

)

Other Income (Expense)

 

$
(4

)

 

The Effect of Derivative Instruments on the Consolidated Statement of Operations

For the Year Ended December 31, 2012

 

Derivatives in Cash
Flow Hedging

 

Amount of
Gain (Loss)
Recognized
in AOCI on
Derivative
(Effective
Portion)

 

Location of
Gain (Loss)
Reclassified
from AOCI
into income
(Effective

 

Amount of
Gain (Loss)
Reclassified
from AOCI
into income
(Effective
Portion)

 

Location of
Gain (Loss)
Recognized in
Income on
Derivative
(Ineffective

 

Amount of
Gain (Loss)
Recognized in
Income on
Derivative
(Ineffective
Portion)

 

Relationships

 

2012

 

Portion)

 

2012

 

Portion)

 

2012

 

Interest rate contracts

 

$
(4,252

)

Interest Expense

 

$
(13,440

)

Other Income (Expense)

 

$
100

 

 

The Effect of Derivative Instruments on the Consolidated Statement of Operations

For the Period from January 1 to July 9, 2014 and for the Years Ended December 31, 2013 and 2012

 

 

 

 

 

Amount of
Gain (Loss) Recognized in Income on
Derivative

 

 

 

Location of

 

For the Period

 

 

 

 

 

 

 

Gain (Loss)

 

from January 1 to

 

 

 

Derivatives not designated

 

Recognized in Income

 

July 9,

 

For the Year Ended December 31,

 

as Hedging Instruments

 

on Derivative

 

2014

 

2013

 

2012

 

Interest rate contracts

 

Interest Expense

 

$
(225

)

$

—

 

$

—

 

 

The Company was required to provide collateral in the form of vessel assets to support the interest rate swap agreements, excluding vessel assets of Baltic Trading.  Prior to the termination of the 2007 Credit Facility on the Effective Date, the Company’s 35 vessels mortgaged under the 2007 Credit Facility served as collateral in the aggregate amount of $100,000.