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Derivative Instruments and Hedging Activities Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Derivatives and Hedging Activities | Derivatives and Hedging Activities Risk Management Objective of Using Derivatives The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity and credit risk primarily by managing the amount, sources and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings. Certain of the Company’s foreign operations expose it to fluctuations of foreign exchange rates. These fluctuations may impact the value of the Company’s cash receipts and payments in terms of its functional currency. The Company enters into derivative financial instruments to protect the value or fix the amount of certain liabilities in terms of its functional currency, the U.S. dollar. Interest Rate Risk Management The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. During 2020 and 2019, such derivatives were used to hedge the variable cash flows associated with the Company’s existing variable-rate debt. Prior to March 5, 2020, the Company’s interest rate derivatives were designated and qualified as cash flow hedges of interest rate risk, where the gain or loss on the derivative was recorded in accumulated other comprehensive income or loss and subsequently reclassified into interest expense in the same period that the hedged transaction affected earnings. Gains and losses on the derivative that represented hedge components excluded from the assessment of effectiveness were recognized over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with the Company’s accounting policy election. The earnings recognition of excluded components was presented in interest expense. Amounts reported in accumulated other comprehensive income or loss related to derivatives were reclassified to interest expense as interest payments were made on the Company’s variable-rate debt. On March 5, 2020, given the potential for changes in the Company’s future expected interest payments that were hedged by these interest rate derivatives as a result of the Merger Agreement, such derivatives no longer qualified as cash flow hedges and were dedesignated as such. Following this dedesignation, all changes in the fair values of the Company’s interest rate derivatives are recognized as a component of interest expense in the consolidated statements of operations and comprehensive (loss) income. The cumulative remaining unrealized gains at the dedesignation date that were previously recognized in accumulated other comprehensive loss will be amortized to interest expense in the consolidated statements of operations and comprehensive (loss) income over the remaining contractual terms for the Company’s interest rate derivatives. The following table sets forth the Company’s outstanding interest rate derivatives that were not designated as a hedging instrument of interest rate risk as of March 31, 2020:
Foreign Exchange Risk Management The Company is exposed to fluctuations in various foreign currencies against its functional currency, the U.S. dollar. The Company uses foreign currency derivatives including cross-currency swaps to manage its exposure to fluctuations in the U.S. dollar to euro exchange rate. Cross-currency swaps involve exchanging fixed-rate interest payments for fixed-rate interest receipts, both of which will occur at the U.S. dollar to euro forward exchange rates in effect upon entering into the instrument. The Company designates these derivatives as cash flow hedges of foreign exchange risks. For derivatives that are designated and that qualify as cash flow hedges of foreign exchange risk, the gain or loss on the derivative is recorded in other comprehensive income (loss) and subsequently reclassified in the period that the hedged transaction affects earnings within the same income statement line item as the earnings effect of the hedged transaction. During the next 12 months, the Company estimates that an additional $0.6 million will be reclassified as a decrease to interest expense. The following table sets forth the Company’s outstanding foreign currency derivatives that were designated as cash flow hedges of foreign exchange risk as of March 31, 2020:
The following table sets forth the effect of the Company’s cash flow hedge accounting on its other comprehensive loss for the three months ended March 31, 2020 and 2019:
The following table sets forth the effect of the Company’s derivative financial instruments on its consolidated statements of operations for the three months ended March 31, 2020 and 2019:
Fair Value of Derivative Financial Instruments The following table sets forth the fair value of the Company’s derivative financial instruments, as well as their classification on the consolidated balance sheets, as of March 31, 2020 and December 31, 2019:
The fair value of the Company’s derivative financial instruments is determined using widely-accepted valuation techniques, including a discounted cash flows analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of the interest rate swaps and the cross-currency swap are determined using the market-standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The fair value of the interest rate cap is determined using the market-standard methodology of discounting the future expected cash receipts that would occur if variable interest rates rise above the strike rate of the cap. The variable interest rates used in the calculation of projected receipts on the cap are based on an expectation of future interest rates derived from observable market interest rate curves and volatilities. The Company incorporates credit valuation adjustments to appropriately reflect both its non-performance risk and the respective counterparty’s non-performance risk in the fair value measurements. In adjusting the fair value of the Company’s derivative contracts for the effect of non-performance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees. The Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. The Company has determined the impact of the credit valuation adjustments made to its derivative contracts, which determination was based on the fair value of each individual contract, was not significant to the overall valuation. As a result, all of the Company’s derivatives held as of March 31, 2020 and 2019 were classified as Level 2 within the fair value hierarchy. As of March 31, 2020, the fair value of the Company’s derivatives was in a net liability position of $0.8 million for its contracts, which included accrued interest but excluded any adjustment for non-performance risk. As of March 31, 2020, the Company had not posted any collateral related to these contracts. If the Company had breached any credit-risk related provisions as of March 31, 2020, it could have been required to settle its obligations under the contracts at their termination value of $0.8 million.
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