Derivative Financial Instruments

9 Months Ended

Sep. 30, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

On September 27, 2022, the Company entered into a floating-to-fixed interest rate swap with respect to the $350 million 2021 Term Loan through the maturity date of August 30, 2024. This swap effectively fixed the underlying SOFR rate at 4.23%.

On the date the Company entered into this derivative contract, the Company designated the derivative as a hedge to the exposure to variable cash flows of a forecasted transaction (referred to as a "cash flow hedge"). For a cash flow hedge determined to be highly effective, the derivative's gain or loss is initially reported as a component of other comprehensive income or loss and subsequently reclassified into net income when the forecasted transaction affects earnings.

The cash flow hedge is measured at fair value using observable inputs other than quoted prices in active markets, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. These inputs are considered Level 2 inputs in the Fair Value Hierarchy and the Company engages a third party expert to determine these inputs. The fair value of the cash flow hedge is determined using the conventional industry methodology of netting the discounted future fixed cash payments and the discounted expected variable cash receipts made between the Company and its counterparty to the cash flow hedge. These variable cash receipts are based on the expectation of future interest rates which are derived from observed market interest rate curves. In addition, any credit valuation adjustments are considered in the fair values to account for potential nonperformance risk to the

extent they would be significant inputs to the calculation. For the period presented, it was determined that credit valuation adjustments were not considered to be significant inputs.

As of September 30, 2022, the fair value of this swap was $652,000, which approximates the amount the Company would owe the counter-party under the swap in the event of early termination. This $652,000 is included in other liabilities in the Company's consolidated balance sheet and it is entirely offset in accumulated other comprehensive loss within equity. For the three and nine months ended September 30, 2022, $63,000 of incremental interest expense is included in the Company's consolidated statement of operations related to current net cash settlements under the swap. We estimate an additional expense of $375,000 will be reclassified to interest expense over the next twelve months, due to expected settlements on this cash flow hedge.

The counterparty under this swap is a major financial institution and the swap contains provisions whereby if we default on certain of our indebtedness, and such default results in repayment of such indebtedness being, or becoming capable of being, accelerated by the lender, then we could also be declared in default under the swap.