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Derivatives and Hedging Activities
 6 Months Ended
Jun. 30, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives and Hedging Activities
13.Derivatives and Hedging Activities

 

In connection with the 2018 refinancing (see Note 12), the Company entered into a 3-year, fixed-rate, cross-currency swap with Nomura Global Financial Products Inc. which swaps the principal and interest payments that will be payable in USD under the Note Purchase Agreement to Euros ("EUR"), in part, and GBP, in part. Specifically, with respect to the principal payments 1/3 of the payments will be swapped from USD to EUR and 2/3 of the payments from USD to GBP. Additionally, with respect to the interest payments 1/3 will be swapped from USD to GBP and 2/3 from USD to EUR. The swap provides for a foreign exchange rate of $1.13935 USD per €1 EUR and $1.27565 USD per £1 GBP.

 

Risk Management Objective of Using Derivatives

 

The Company is exposed to certain risk 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 the Company to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value of the Company's cash receipts and payments in terms of the Company's 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, GBP.

 

Hedges of Multiple Risks

 

The Company has variable-rate borrowings denominated in currencies other than its functional currency. As a result, the Company is exposed to fluctuations in both the underlying variable interest rate and the foreign currency of the borrowing against its functional currency, GBP. The Company uses derivatives including cross-currency interest rate swaps to manage its exposure to fluctuations in the variable borrowing rate and the GBP-USD exchange rate. Cross-currency interest rate swaps involve exchanging fixed rate interest payments for floating rate interest receipts both of which will occur at the GBP-USD forward exchange rates in effect upon entering into the instrument. The Company designates these derivatives as cash flow hedges of both interest rate and foreign exchange risks.

 

For derivatives designated and that qualify as cash flow hedges of both interest rate risk and foreign exchange risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified in the periods during which the hedged transaction affects earnings within the same income statement line item as the earnings effect of the hedged transaction. The Company estimates that during the year ended December 31, 2019, $1.5 million will be reclassified as a reduction to interest expense.

 

As of June 30, 2019 and September 30, 2018, the Company had the following outstanding derivatives designated as cash flow hedges that were used to hedge both interest rate risk and foreign exchange risk:

 

Foreign Currency Derivative  Number of
Instruments		  Pay Fixed
Notional		   Receive
Floating
Notional		 
      (in millions) 
Cross currency interest rate swaps  1  GBP36.6   USD46.7 

 

Non-designated Hedges

 

Derivatives not designated as hedges are not speculative and are used to manage the Company's exposure to interest rate movements and other identified risks but do not meet the strict hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.

 

As of June 30, 2019 and September 30, 2018, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships:

 

Foreign Currency Derivative  Number of
Instruments		  Pay Fixed
Notional		   Receive
Floating
Notional		 
      (in millions)   (in millions) 
Cross currency interest rate swaps  1  EUR 81.9   USD93.3 

 

The table below presents the fair value of the Company's derivative financial instruments as well as their classification in the consolidated balance sheet as of June 30, 2019.

 

   Balance Sheet
Classification		  Asset
Derivatives
Fair Value		   Balance Sheet
Classification		  Liability
Derivatives
Fair Value		 
      (in millions)      (in millions) 
Derivatives designated as hedging instruments:              
Interest Rate and Foreign Exchange Products  Fair Value of Hedging Instruments  $0.5   Derivative Liability  $(0.8)
Total derivatives designated as hedging instruments     $0.5      $(0.8)
Derivatives not designated as hedging instruments:                
Interest Rate and Foreign Exchange Products  Fair Value of Hedging Instruments  $—   Derivative Liability  $(3.8)
Total derivatives not designated as hedging instruments     $—      $(3.8)

 

The table below presents the fair value of the Company's derivative financial instruments as well as their classification in the consolidated balance sheet as of September 30, 2018.

 

   Balance Sheet
Classification		  Asset
Derivatives
Fair Value		   Balance Sheet
Classification		  Liability
Derivatives
Fair Value		 
      (in millions)      (in millions) 
Derivatives designated as hedging instruments:              
Interest Rate and Foreign Exchange Products  Fair Value of Hedging Instruments  $0.8   Derivative Liability  $(3.4)
Total derivatives designated as hedging instruments     $0.8      $(3.4)
Derivatives not designated as hedging instruments:                
Interest Rate and Foreign Exchange Products  Fair Value of Hedging Instruments  $—   Derivative Liability  $(4.4)
Total derivatives not designated as hedging instruments     $—      $(4.4)

 

The table below presents the effect of fair value and cash flow hedge accounting on accumulated other comprehensive income as of June 30, 2019.

 

   Amount of Gain
Recognized in Other Comprehensive
Income on
Derivative		      Location of Gain
Reclassified from Accumulated Other Comprehensive
Income into Income		 
    (in millions)       (in millions) 
Interest Rate and Foreign Exchange Products  $0.3   Interest Expense  $0.9 
        Foreign Currency Remeasurement   0.2 
Total  $0.3      $1.1 

 

There were no effects of fair value and cash flow hedge accounting on accumulated other comprehensive income as of June 30, 2018.

 

The table below presents the effect of the Company's derivative financial instruments on the consolidated income statements as of June 30, 2019.

 

   Interest Expense   Foreign Currency Remeasurement 
    (in millions)  
Total amounts of income and expense line items presented in the statement of operations and comprehensive loss in which the effects of fair value or cash flow hedges are recorded  $8.5   $(0.3)
           
Gain/(loss) on cash flow hedging relationships in Subtopic 815-20  $0.9   $0.2 

 

There were no effects of the Company's derivative financial instruments on the consolidated income statements as of June 30, 2018.

 

The table below presents the effect of the Company's derivative financial instruments that are not designated as hedging instruments in the consolidated income statement as of June 30, 2019.

 

Derivatives Not Designated as Hedging Instruments under Subtopic 815-20 

Location of

Income

Recognized in
Income on
Derivative

  Amount of Income Recognized in
Income on
Derivative		 
       (in millions) 
Interest Rate and Foreign Exchange Products  Change in fair value of derivative liability  $(0.1)

 

There were no effects of the Company's derivative financial instruments that are not designated as hedging instruments in the consolidated income statement as of June 30, 2018.

 

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of June 30, 2019 and September 30, 2018. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the consolidated balance sheet.

 

The ISDA Master Agreement between Gaming Acquisitions Limited and Nomura Global Financial Products, Inc. is documented using the 2002 Form and the ISDA standard set-off provision in Section 6(f) of the ISDA Master Agreement apply to both parties and is only modified to include Affiliates of the Payee. There is no CSA and thus there is no collateral posting. The only other security for the ISDA include a guaranty of Nomura's obligations from Nomura Holdings, Inc. and with respect to Gaming Acquisitions Limited, its obligations under the ISDA are cross-collateralized with the debt obligations under the Credit Agreement in the same pool of collateral that supports the debt obligations.

 

Offsetting of Derivative Assets

 

June 30, 2019

              

Gross Amounts Not Offset in the

Statement of Financial Position

 
   Gross Amounts
of Recognized
Assets		   Gross
Amounts
Offset in the
Statement of
Financial
Position		  

Net Amounts
of Assets
presented in  

the Statement
of Financial
Position  

   Financial
Instruments		   Cash
Collateral
Received		   Net
Amount		 
   (in millions) 
Fair value of hedging instrument  $0.5   $—   $0.5   $—   $—   $— 
                               

 

Offsetting of Derivative Liabilities
June 30, 2019                        
              

Gross Amounts Not Offset in the
Statement of Financial Position

 
   Gross Amounts
of Recognized
Liabilities		   Gross
Amounts
Offset in the
Statement of
Financial
Position		   Net Amounts
of Liabilities
presented in the Statement
of Financial
Position		   Financial
Instruments		   Cash
Collateral
Received		   Net
Amount		 
   (in millions) 
Fair value of hedging instrument  $4.6   $—   $4.6   $—   $—   $— 
                               

 

Offsetting of Derivative Assets
September 30, 2018                        
              

Gross Amounts Not Offset in the
Statement of Financial Position

 
   Gross Amounts
of Recognized
Assets		   Gross
Amounts
Offset in the
Statement of
Financial
Position		   Net Amounts
of Assets
presented in the Statement
of Financial
Position		   Financial
Instruments		   Cash
Collateral
Received		   Net
Amount		 
   (in millions) 
Fair value of hedging instrument  $0.8   $—   $0.8   $—   $—   $— 

 

Offsetting of Derivative Liabilities
September 30, 2018                        
              

Gross Amounts Not Offset in the
Statement of Financial Position

 
   Gross Amounts
of Recognized
Liabilities		   Gross
Amounts
Offset in the
Statement of
Financial
Position		   Net Amounts
of Liabilities
presented in the Statement
of Financial
Position		   Financial
Instruments		   Cash
Collateral
Received		   Net
Amount		 
   (in millions) 
Fair value of hedging instrument  $7.8   $—   $7.8   $—   $—   $— 

  

Credit-risk-related Contingent Features

 

The Company has entered into an industry standard ISDA Master Agreement, with a negotiated Scheduled thereto (the "ISDA Agreement"), with the counterparty to its derivative transactions and which ISDA Agreement sets forth various provisions which govern the trading relationship between the Company and its counterparty. Such provisions include certain events which, if triggered by either party, may give rise to an acceleration of the ISDA Agreement, thus triggering the exchange of a breakage payment between the parties.

 

The ISDA Agreement with the Company's derivative counterparty contains a provision where the Company could be declared in default on its derivative obligations if, among others, its repayment of the underlying indebtedness is accelerated by the lender due to the Company's default on the indebtedness. The ISDA Agreement can also be accelerated if the Company's creditworthiness becomes materially weaker as the result of a merger, change of control or substantial change in capital structure or if the Company's obligations under the ISDA Agreement are no longer secured with the underlying indebtedness.

 

As of June 30, 2019 and September 30, 2018, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to the ISDA Agreements was ($4.1) and ($7.0), respectively. As of June 30, 2019, the Company has not posted any collateral related to the ISDA Agreement, as no collateral is required under the terms of such ISDA Agreement. If the Company had breached any of the provision under the ISDA Agreement which resulted in an acceleration of the ISDA Agreement at June 30, 2019, it could have been required to settle its obligations under the ISDA Agreement at its termination value of $5.6.