Derivative Financial Instruments

9 Months Ended

Sep. 30, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

We do not use derivative financial instruments for trading or speculative purposes and our derivative financial instruments are limited to interest rate swap and interest rate cap agreements. The Company utilizes a combination of fixed rate debt and variable rate debt to finance its operations. The variable rate debt exposes the Company to variability in interest payments due to changes in interest rates. Management believes that it is prudent to mitigate the interest rate risk on a portion of its variable rate borrowings. To satisfy our objectives and requirements, the Company has entered into interest rate swap and interest rate cap agreements, which have not been designated as cash flow hedges, to manage our exposure to interest rate fluctuations on our variable rate debt.

All derivative financial instruments are recognized as either assets or liabilities on the condensed consolidated balance sheets with measurement at fair value. On a quarterly basis, the fair values of our interest rate swaps and interest rate caps are determined based on observable inputs. These derivative instruments have not been designated as cash flow hedges and as such, the initial fair value and any subsequent gains or losses on the change in the fair value of the interest rate swaps and interest rate caps are reported in earnings as a component of interest expense. Any gains or losses related to the quarterly fair value adjustments are presented as a non-cash operating activity on the condensed consolidated statements of cash flows. By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the possible failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is negative, the Company owes the counterparty and, therefore, it is not subject to credit risk. The Company minimizes the credit risk in derivative financial instruments by entering into transactions with major financial institutions with credit ratings of A- or higher, or the equivalent dependent upon the credit rating agency.

Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with interest-rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. See Note 2, “Summary of Significant Accounting Policies – Fair Value of Financial Instruments” for additional information regarding our interest rate swaps and interest rate caps.

The Company has entered into the following interest rate swaps that effectively convert $300.0 million, or approximately 17%, of the Company’s variable rate debt to fixed rate debt as of September 30, 2012. Since the RHDI Amended and Restated Credit Facility and the Dex Media West Amended and Restated Credit Facility are subject to a LIBOR floor of 3.00% and the LIBOR rate is below that floor at September 30, 2012, both credit facilities are effectively fixed rate debt until such time LIBOR exceeds the stated floor. At September 30, 2012, approximately 89% of our total debt outstanding consisted of variable rate debt, excluding the effect of our interest rate swaps. Including the effect of our interest rate swaps, total fixed rate debt comprised approximately 26% of our total debt portfolio as of September 30, 2012.

Interest Rate Swaps – Dex Media East

Effective Dates	Notional Amount			Pay Rates	Maturity Dates
(amounts in millions)
February 26, 2010	$	100	(1)	1.796%	February 28, 2013
March 5, 2010	100		(1)	1.688%	January 31, 2013
March 10, 2010	100		(1)	1.75%	January 31, 2013
Total	$	300

⁽¹⁾ Consists of one swap

Under the terms of the interest rate swap agreements, we receive variable interest based on the three-month LIBOR and pay a weighted average fixed rate of 1.7%. The weighted average rate received on our interest rate swaps was 0.5% for the nine months endedSeptember 30, 2012. These periodic payments and receipts are recorded as interest expense.

Under the terms of the interest rate cap agreements, the Company will receive payments based on the spread in rates if the three-month LIBOR rate increases above the cap rates noted in the table below. The Company paid $2.1 million for the interest rate cap agreements entered into during the first quarter of 2010. We are not required to make any future payments related to these interest rate cap agreements.

Interest Rate Caps – RHDI

Effective Dates	Notional Amount			Cap Rates	Maturity Dates
(amounts in millions)
February 26, 2010	$	100	(2)	3.5%	February 28, 2013
March 8, 2010	100		(2)	3.5%	January 31, 2013
Total	$	200

⁽²⁾ Consists of one cap

The following tables present the fair value of our interest rate swaps and interest rate caps at September 30, 2012 and December 31, 2011. The fair value of our interest rate swaps is presented in accounts payable and accrued liabilities and other non-current liabilities and the fair value of our interest rate caps is presented in prepaid expenses and other current assets and other non-current assets on the condensed consolidated balance sheets at September 30, 2012 and December 31, 2011. The following tables also present the (gain) loss recognized in interest expense from the change in fair value of our interest rate swaps and interest rate caps for the three and nine months endedSeptember 30, 2012 and 2011, respectively.

							Gain Recognized in Interest Expense from the Change in Fair Value of Interest Rate Swaps
	Fair Value Measurements at						Three Months Ended September 30,						Nine Months Ended September 30,
Interest Rate Swaps	September 30, 2012			December 31, 2011			2012			2011			2012			2011
Accounts payable and accrued liabilities	$	(1,235	)	$	(2,269	)	$	(605	)	$	(1,023	)	$	(1,034	)	$	(1,237	)
Other non-current liabilities	—			(425		)	—			(565		)	(425		)	(876		)
Total	$	(1,235	)	$	(2,694	)	$	(605	)	$	(1,588	)	$	(1,459	)	$	(2,113	)
							(Gain) Loss Recognized in Interest Expense from the Change in Fair Value of Interest Rate Caps
	Fair Value Measurements at						Three Months Ended September 30,						Nine Months Ended September 30,
Interest Rate Caps	September 30, 2012			December 31, 2011			2012			2011			2012			2011
Prepaid expenses and other current assets	$	—		$	1		$	—		$	(3	)	$	1		$	—
Other non-current assets	—			4			—			26			4			287
Total	$	—		$	5		$	—		$	23		$	5		$	287

The Company recognized expense related to our interest rate swaps and interest rate caps, including accrued interest, of $0.4 million and less than $0.1 million during the three months ended September 30, 2012 and 2011, respectively, and $1.6 million and $2.9 million during the nine months endedSeptember 30, 2012 and 2011, respectively.