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FAIR VALUE OF FINANCIAL INSTRUMENTS, DERIVATIVES AND FAIR VALUE DISCLOSURES
9 Months Ended
Sep. 30, 2020
FAIR VALUE OF FINANCIAL INSTRUMENTS, DERIVATIVES AND FAIR VALUE DISCLOSURES [Abstract]  
FAIR VALUE OF FINANCIAL INSTRUMENTS, DERIVATIVES AND FAIR VALUE DISCLOSURES

Note 8 — Fair Value of Financial Instruments, Derivatives and Fair Value Disclosures:

The estimated fair values of the Company’s financial instruments, other than derivatives that are not measured at fair value on a recurring basis, categorized based upon the fair value hierarchy, are as follows:

(Dollars in thousands)

Fair Value

Level 1

Level 2

September 30, 2020:

Cash and cash equivalents (1)

$

153,654

$

153,654

$

Core Term Loan Facility

(281,048)

(281,048)

Sinosure Credit Facility

(252,021)

(252,021)

8.5% Senior Notes

(25,500)

(25,500)

December 31, 2019:

Cash and cash equivalents (1)

$

150,243

$

150,243

$

2017 Term Loan Facility

(333,177)

(333,177)

ABN Term Loan Facility

(23,248)

(23,248)

Sinosure Credit Facility

(269,705)

(269,705)

8.5% Senior Notes

(26,120)

(26,120)

10.75% Subordinated Notes

(32,649)

(32,649)

(1)Includes non-current restricted cash of $16.3 million and $60.6 million at September 30, 2020 and December 31, 2019, respectively.

Derivatives

The Company uses interest rate caps, collars and swaps for the management of interest rate risk exposure associated with changes in LIBOR interest rate payments due on its credit facilities. In connection with its entry into the Core Term Loan Facility (see Note 9, “Debt”) on January 28, 2020, the Company, in a cashless transaction, converted the $350 million notional interest rate collar into an amortizing $250 million notional pay-fixed, receive-three-month LIBOR interest rate swap subject to a 0% floor. The term of the new hedging arrangement was extended to coincide with the maturity of the Core Term Loan Facility of January 23, 2025 at a fixed rate of 1.97%.  The interest rate swap agreement has been re-designated and qualifies as a cash flow hedge and contains no leverage features. Changes in the fair value of the interest rate collar prior to the re-designation on January 28, 2020 recorded through earnings during the first quarter of 2020 totaled a loss of $1.3 million.  

During April 2020, the Company entered into an interest rate swap agreement with a major financial institution covering a notional amount of $25 million of the Core Term Loan Facility that effectively converts the Company’s interest rate exposure from a three-

month LIBOR floating rate to a fixed rate of 0.50% through the maturity date of January 23, 2025, effective June 30, 2020. The interest rate swap agreement, which contains no leverage features, is designated and qualifies as a cash flow hedge.

The Company is also party to a floating-to-fixed interest rate swap agreement with a major financial institution covering the balance outstanding under the Sinosure Credit Facility that effectively converts the Company’s interest rate exposure under the Sinosure Credit Facility from a floating rate based on three-month LIBOR to a fixed rate of 2.76% through the termination date of March 21, 2025. The interest rate swap agreement is designated and qualifies as a cash flow hedge and contains no leverage features. In July 2020, the Company extended the maturity date of the interest rate swap from March 21, 2025 to December 21, 2027 and reduced the fixed three-month LIBOR rate from 2.76% to 2.35%, effective June 21, 2020. The new interest rate swap agreement does not in its entirety meet the definition of a derivative instrument because of its off market fixed rate at inception and is deemed to be a hybrid instrument with a financing component and an embedded at-the-market derivative. Such embedded derivative is bifurcated and accounted for separately in the same manner as our other derivatives. The financing component is recorded in current and noncurrent other liabilities on the consolidated balance sheet at amortized cost. Due to an other-than-insignificant financing element on a portion of such hybrid instrument, the cash flows associated with this hybrid instrument are classified as financing activities in the consolidated statement of cash flows.

Derivatives are recorded on a net basis by counterparty when a legal right of offset exists. The Company had the following amounts recorded on a gross basis by transaction in the accompanying unaudited condensed consolidated balance sheets related to the Company’s use of derivatives as of September 30, 2020 and December 31, 2019:

(Dollars in thousands)

Long-term derivative
asset

Current portion of derivative liability

Long-term derivative
liability

Accounts payable, accrued expenses and other current liabilities

Other
liabilities

September 30, 2020:

Derivatives designated as cash flow hedges:

Interest rate swaps

$

973

$

(4,035)

$

(6,200)

$

$

Other-than-insignificant financing element of derivatives:

Interest rate swaps(1)

(3,013)

(14,788)

Total

$

973

$

(4,035)

$

(6,200)

$

(3,013)

$

(14,788)

December 31, 2019:

Derivatives designated as cash flow hedges:

Interest rate swaps

$

$

(2,384)

$

(5,968)

$

$

Derivatives not designated as cash flow hedges:

Interest rate collar

(1,230)

(577)

Total

$

$

(3,614)

$

(6,545)

$

$

(1)Represents the financing element of the hybrid instrument discussed above, which is recorded at amortized cost.

The following tables present information with respect to gains and losses on derivative positions reflected in the condensed consolidated statements of operations or in the condensed consolidated statements of comprehensive income.

The effect of cash flow hedging relationships recognized in other comprehensive income/(loss) excluding amounts reclassified from accumulated other comprehensive loss, including hedges of equity method investees, for the three and nine months ended September 30, 2020 and 2019 follows:

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2020

2019

2020

2019

Derivatives designated as cash flow hedges:

Interest rate swaps

$

(1,126)

$

(2,796)

$

(20,075)

$

(15,722)

Interest rate cap/collar

(2,786)

(3,795)

Other-than-insignificant financing element of derivatives:

Interest rate swaps

(883)

(883)

Total other comprehensive loss

$

(2,009)

$

(5,582)

$

(20,958)

$

(19,517)

The effect of cash flow hedging relationships on the condensed consolidated statement of operations is presented excluding hedges of equity method investees. The effect of the Company’s cash flow hedging relationships on the condensed consolidated statement of operations for the three and nine months ended September 30, 2020 and 2019 follows:

Three Months Ended September 30,

Nine Months Ended September 30,

(Dollars in thousands)

2020

2019

2020

2019

Derivatives designated as cash flow hedges:

Interest rate swaps

$

1,055

$

480

$

3,367

$

838

Interest rate cap/collar

99

Derivatives not designated as cash flow hedges:

Interest rate collar

1,352

Other-than-insignificant financing element of derivatives:

Interest rate swaps

1,698

1,698

Total interest expense

$

2,753

$

480

$

6,417

$

937

See Note 12, “Accumulated Other Comprehensive Loss,” for disclosures relating to the impact of derivative instruments on accumulated other comprehensive loss.

The following table presents the fair values, which are pre-tax, for assets and liabilities measured on a recurring basis (excluding investments in affiliated companies):

(Dollars in thousands)

Fair Value

Level 1

Level 2

Assets/(Liabilities) at September 30, 2020:

Derivative Assets (interest rate swaps)

$

973

$

$

973

(1)

Derivative Liabilities (interest rate swaps)

(10,235)

(10,235)

(1)

Assets/(Liabilities) at December 31, 2019:

Derivative Assets (interest rate swaps and collar)

$

$

$

(1)

Derivative Liabilities (interest rate swaps and collar)

(10,159)

(10,159)

(1)

(1)For interest rate caps, swaps and collars, fair values are derived using valuation models that utilize the income valuation approach. These valuation models take into account contract terms such as maturity, as well as other inputs such as interest rate yield curves and creditworthiness of the counterparty and the Company.

The following table summarizes the fair values of assets for which an impairment charge was recognized for the nine months ended September 30, 2020:

(Dollars in thousands)

Fair Value

Level 2

Total Impairment
Charges

Assets:

Crude Tankers - Vessels held for use (1)(2)

$

80,910

$

80,910

$

(17,136)

(1)Pre-tax impairment charges of $5.5 million related to one VLCC tanker and $11.7 million related to two VLCC tankers in the Crude Tankers segment were recorded during the three-month periods ended June 30, 2020 and September 30, 2020, respectively.
(2)The fair value measurement of $30.4 million that was used to determine the impairment for one VLCC at June 30, 2020 and the fair value measurement of $50.5 million that was used to determine the impairment for two VLCCs at September 30, 2020 were based upon a market approach, which considered the expected sales price of the vessel obtained from vessel appraisals and executed memoranda of agreements for the sale of each of the vessels as discussed in Note 5, “Vessels.” As sales of vessels occur somewhat infrequently, the expected sales price is considered to be Level 2.