Derivative Financial Instruments

9 Months Ended

Sep. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

8. DERIVATIVE FINANCIAL INSTRUMENTS

Risk Management Objective of Using Derivatives

Certain of our foreign operations expose us to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value of our cash receipts and payments in terms of our functional currency, the U.S. Dollar. In addition, we enter into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of the U.S. Dollar. In addition, we use derivative financial instruments, which include interest rate caps and may also include interest rate swaps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with our borrowings.

The principal objective of such arrangements is to minimize the risks and/or costs associated with our operating and financing structure as well as to hedge specific transactions. We do not intend to utilize derivatives for speculative or other purposes. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, we only enter into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which we and our affiliates may also have other financial relationships. We do not anticipate that any of the counterparties will fail to meet their obligations.

Net Investment Hedges of Foreign Currency Risk

We have made investments in foreign entities that expose us to fluctuations between the U.S. Dollar and the foreign currency of each such investment. Currently, we use derivative financial instruments to manage, or hedge, the variability in the carrying value of certain of our net investments in consolidated, foreign currency-denominated subsidiaries caused by the fluctuations in foreign currency exchange rates. For derivatives that are designated and qualify as a hedge of our net investment in a foreign currency, the gain or loss on such derivatives is reported in other comprehensive income as part of the cumulative translation adjustment to the extent it is effective. Any ineffective portion of a net investment hedge is recognized in our consolidated statement of operations. For derivatives that are not designated as hedging instruments, gains or losses are recognized in our consolidated statement of operations as incurred.

The following table details our outstanding foreign exchange derivatives that were designated as net investment hedges of foreign currency risk (notional amount in thousands):

September 30, 2015						December 31, 2014
Foreign Currency Derivatives	Number of Instruments		Notional Amount			Foreign Currency Derivatives	Number of Instruments		Notional Amount
Sell CAD Forward		1		C$	162,000	Sell CAD Forward		1		C$	42,525
Sell GBP Forward		1		£	96,900
Sell EUR Forward		1		€	50,000

Cash Flow Hedges of Interest Rate Risk

Our objective in using interest rate derivatives is to add stability to interest expense and to manage our exposure to interest rate movements. In addition, we may be required by our lenders to enter into certain derivative contracts related to our credit facilities. To accomplish this objective, we primarily use interest rate caps. Interest rate caps designated as cash flow hedges involve the receipt of variable-rate amounts if interest rates rise above a certain level in exchange for an up-front premium.

The effective portion of changes in the fair value of derivatives designated and qualifying as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged transaction affects net income. These derivatives were used to hedge the variable cash flows associated with floating rate debt. The ineffective portion of the change in fair value of such derivatives is recognized directly in net income. We have not recognized any income or loss resulting from hedge ineffectiveness of interest rate caps in our consolidated statement of operations during the nine months ended September 30, 2015 and 2014.

Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on our floating rate debt. During the twelve months following September 30, 2015, we estimate that an additional $367,000 will be reclassified from other accumulated comprehensive income as an increase to interest expense.

As of September 30, 2015, we had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk (notional amount in thousands):

Interest Rate	Number of Instruments	Notional Amount		Strike	Index	Wtd. Avg. Maturity
Interest Rate Caps	26	$	1,097,632	2%	USD LIBOR	1.6
Interest Rate Caps	11	C	550,589	2%	CDOR	1.5
Interest Rate Caps	1	€	152,710	2%	EURIBOR	1.3
Interest Rate Caps	1	£	15,142	2%	GBP LIBOR	1.6

We did not have any interest rate derivatives that were designated as cash flow hedges of interest rate risk as of December 31, 2014.

Non-designated Hedges

Derivatives not designated as hedges are not speculative and are used to manage our exposure to interest rate movements and other identified risks, but do not meet the strict hedge accounting requirements of ASC 815 – “Derivatives and Hedging.” Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in our consolidated statement of operations. During both the three and nine months ended September 30, 2015, we recorded losses of $748,000 and $759,000, respectively related to non-designated hedges.

As of September 30, 2015, we had the following outstanding non-designated hedges (notional amount in thousands):

	Number of		Notional
Non-designated Hedges	Instruments		Amount
Sell EUR / Buy GBP Forward		1		€	12,857
Interest Rate Caps		1		$	13

We did not have any non-designated hedges outstanding as of December 31, 2014.

Valuation of Derivative Instruments

The following table summarizes the fair value of our derivative financial instruments ($ in thousands):

	Fair Value of Derivatives in an				Fair Value of Derivatives in a
	Asset Position(1) as of				Liability Position(2) as of
	September 30, 2015		December 31, 2014		September 30, 2015		December 31, 2014
Derivatives designated as hedging instruments:
Foreign exchange contracts	$	3,416	$	1,138	$	108	$	—
Interest rate caps		314		—		—		—
Total derivatives designated as hedging instruments	$	3,730	$	1,138	$	108	$	—
Derivatives not designated as hedging instruments:
Foreign exchange contracts	$	—	$	—	$	260	$	—
Interest rate caps		—		—		—		—
Total derivatives not designated as hedging instruments	$	—	$	—	$	260	$	—
Total Derivatives	$	3,730	$	1,138	$	368	$	—

(1) Included in accrued interest receivable, prepaid expenses, and other assets in our consolidated balance sheet.

(2) Included in accounts payable, accrued expenses, and other liabilities in our consolidated balance sheet.

The following table presents the effect of our derivative financial instruments on our consolidated statement of operations for the three and nine months ended September 30, 2015 ($ in thousands):

	Amount of Gain							Amount of Gain
	(Loss) Recognized in						Location of	(Loss) Reclassified from
	OCI on Derivatives						Gain (Loss)	Accumulated OCI into
	(Effective Portion)(1)						Reclassified from	Income (Effective Portion)
Derivatives in Hedging Relationships	Three Months Ended September 30, 2015			Nine Months Ended September 30, 2015			Accumulated OCI into Income (Effective Portion)	Three Months Ended September 30, 2015		Nine Months Ended September 30, 2015
Net Investment Foreign exchange contracts	$	15,478		$	16,330		Gain (Loss) on Sale of Subsidiary	$	—	$	—
Cash Flow Hedges Interest rate caps contracts		(587	)		(1,410	)	Interest Expense		—		—
Total	$	14,891		$	14,920			$	—	$	—

(1) During the three and nine months ended September 30, 2015, we received net cash settlements of $10.8 million and $13.7 million, respectively, on our foreign currency forward contracts. Those amounts are included as a component of accumulated other comprehensive loss on our consolidated balance sheet.

We did not have any derivative financial instruments as of or during the nine months ended September 30, 2014.

Credit-Risk Related Contingent Features

We have entered into agreements with certain of our derivative counterparties that contain provisions where if we were to default on any of our indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, we may also be declared in default on our derivative obligations. In addition, certain of our agreements with our derivative counterparties require that we post collateral to secure net liability positions. As of September 30, 2015, we were in a net asset position with both of our derivative counterparties.