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7. DERIVATIVE FINANCIAL INSTRUMENTS
In order to manage the risk associated with changes in interest rates, we have entered into interest rate swap agreements that effectively convert a portion of our floating-rate debt to a fixed-rate basis, thereby reducing the impact of interest rate changes on future cash interest payments. We account for these transactions as cash flow hedges under the FASB’s ASC Topic 815 (“ASC 815”), Derivatives and Hedging. The swaps are designated as cash flow hedges of our expected future interest payments. In a cash flow hedge, the effective portion of the change in the fair value of the hedging derivative is recorded in accumulated other comprehensive income (loss) (“AOCI”) and is subsequently reclassified into earnings during the same period in which the hedged item impacts earnings. The change in fair value of any ineffective portion of the hedging derivative is recognized immediately in earnings.
The following interest rate swaps, all designated as cash flow hedges, were outstanding at September 30, 2012:
|
(In thousands) |
|
Notional
Amount |
|
2012 Balance Sheet Location |
|
Fair Value |
|
|
Fixed to 3-month floating LIBOR |
|
$ |
230,000 |
|
Current portion of derivative liability |
|
$ |
(3,657 |
) |
|
3-month floating LIBOR minus spread to 1-month floating LIBOR |
|
230,000 |
|
Current portion of derivative liability |
|
(77 |
) |
|
Fixed to 1-month floating LIBOR |
|
100,000 |
|
Other long-term liabilities |
|
(1,804 |
) |
|
Fixed to 1-month floating LIBOR |
|
300,000 |
|
Current portion of derivative liability |
|
(3,067 |
) |
|
Forward starting fixed to 1-month floating LIBOR |
|
175,000 |
|
Other long-term liabilities |
|
(2,331 |
) |
|
Total Fair Values |
|
|
|
|
|
$ |
(10,936 |
) |
|
|
|
|
|
|
|
|
|
|
The following interest rate swaps, all designated as cash flow hedges, were outstanding at December 31, 2011:
|
(In thousands) |
|
Notional
Amount |
|
2011 Balance Sheet Location |
|
Fair Value |
|
|
Fixed to 3-month floating LIBOR |
|
$ |
100,000 |
|
Current portion of long-term liabilites |
|
$ |
(3,401 |
) |
|
Fixed to 3-month floating LIBOR |
|
130,000 |
|
Other long-term liabilities |
|
(6,053 |
) |
|
3-month floating LIBOR minus spread to 1-month floating LIBOR |
|
100,000 |
|
Current portion of long-term liabilites |
|
(179 |
) |
|
3-month floating LIBOR minus spread to 1-month floating LIBOR |
|
130,000 |
|
Other long-term liabilities |
|
(269 |
) |
|
Fixed to 1-month floating LIBOR |
|
300,000 |
|
Other long-term liabilities |
|
(5,343 |
) |
|
Forward starting fixed to |
|
|
|
|
|
|
|
|
1- month floating LIBOR |
|
200,000 |
|
Other long-term liabilities |
|
(736 |
) |
|
Total Fair Values |
|
|
|
|
|
$ |
(15,981 |
) |
|
|
|
|
|
|
|
|
|
|
At September 30, 2012 and December 31, 2011, the interest rate on approximately 72% and 60%, respectively, of our outstanding debt under the term loan credit facility was fixed through the use of interest rate swaps.
The counterparties to our various swaps are 5 major U.S. and European banks. None of the swap agreements provide for either us or the counterparties to post collateral nor do the agreements include any covenants related to the financial condition of Consolidated or the counterparties. The swaps of any counterparty that is a “Lender” as defined in our credit facility are secured along with the other creditors under the credit facility. Each of the swap agreements provides that in the event of a bankruptcy filing by either Consolidated or the counterparty, any amounts owed between the two parties would be offset in order to determine the net amount due between parties. This provision allows us to partially mitigate the risk of non-performance by a counterparty.
At September 30, 2012 and December 31, 2011, the pretax deferred losses related to our interest rate swap agreements included in other comprehensive income totaled $10.9 million and $15.9 million, respectively. The change in fair value of any ineffective portion of the hedging derivative is recognized immediately in earnings.
Information regarding our cash flow hedge transactions is as follows:
|
|
|
Quarter Ended |
|
Nine Months Ended |
|
|
|
|
September 30, |
|
September 30, |
|
|
(In thousands) |
|
2012 |
|
2011 |
|
2012 |
|
2011 |
|
|
Gain recognized AOCI, pretax |
|
$ |
(2,512 |
) |
|
$ |
(3,347 |
) |
|
$ |
(5,021 |
) |
|
$ |
(8,076 |
) |
|
|
Gain arising from ineffectiness reducing interest expense |
|
$ |
(9 |
) |
|
$ |
(19 |
) |
|
$ |
(40 |
) |
|
$ |
(77 |
) |
|
|
Deferred losses/(gains) reclassed from AOCI to interest expense |
|
$ |
(14 |
) |
|
$ |
316 |
|
|
$ |
(15 |
) |
|
$ |
1,201 |
|
|
|
|
|
September 30, |
|
December 31, |
|
|
(In thousands, except months) |
|
2012 |
|
2011 |
|
|
Aggregate notional value of current derivatives outstanding |
|
$ |
630,000 |
|
|
$ |
530,000 |
|
|
|
Aggregate notional value of forward derivatives outstanding |
|
$ |
175,000 |
|
|
$ |
200,000 |
|
|
|
Period through which derivative positions currently exist |
|
March 2016 |
|
|
June 2015 |
|
|
|
Fair value of derivatives |
|
$ |
10,936 |
|
|
$ |
15,981 |
|
|
|
Deferred losses included in AOCI (pretax) |
|
$ |
10,927 |
|
|
$ |
15,932 |
|
|
|
Losses included in AOCI to be recognized in the next 12 months |
|
$ |
13 |
|
|
$ |
65 |
|
|
|
Number of months over which loss in OCI is to be recognized |
|
6 |
|
|
15 |
|
|
|