Fair Value of Financial Instruments

9 Months Ended

Jun. 30, 2012

Fair Value of Financial Instruments

Fair Value of Financial Instruments

7. Fair Value of Financial Instruments

        GAAP establishes a framework for measuring fair value and expands disclosures about fair value measurements. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

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  Level 1—Quoted prices in active markets for identical assets or liabilities.

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  Level 2—Observable inputs other than Level 1 prices, 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 assets or liabilities.

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  Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

        The following table summarizes liabilities measured at fair value on a recurring basis at June 30, 2012:

	Level 1		Level 2			Level 3
Liabilities:
Current:
Interest rate swaps (included in other current liabilities)	$	—	$	(8,182	)	$	—
Cross currency swaps (included in other current liabilities)	$	—	$	—		$	(3,300	)
Non-current:
Interest rate swaps (included in other liabilities)	$	—	$	(6,804	)	$	—
Cross currency swaps (included in other liabilities)	$	—	$	—		$	(10,550	)

        The following table summarizes liabilities measured at fair value on a recurring basis at September 30, 2011:

	Level 1		Level 2			Level 3
Liabilities:
Current:
Interest rate swaps (included in other current liabilities)	$	—	$	(9,102	)	$	—
Cross currency swaps (included in other current liabilities)	$	—	$	—		$	(2,160	)
Non-current:
Interest rate swaps (included in other liabilities)	$	—	$	(8,386	)	$	—
Cross currency swaps (included in other liabilities)	$	—	$	—		$	(8,966	)

        Our swap contracts are measured at fair value based on a market approach valuation technique. With the market approach, fair value is derived using prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. Although non-performance risk of the Company and the counterparty is present in all swap contracts and is a component of the estimated fair values, we do not view non-performance risk to be a significant input to the fair value for the interest rate swap contracts. However, with respect to our cross currency swap contracts, we believe that non-performance risk is higher; therefore we classify these swap contracts as "Level 3" in the fair value hierarchy and, accordingly, records estimated fair value adjustments based on internal projections and views of those contracts. The performance risk for the cross currency swap contracts as a percentage of the unadjusted liabilities ranged from 16.5% to 24.4% (18.7% weighted average).

        The following table shows the Level 3 activity related to cross currency swaps for the three and nine months ended June 30, 2012 and 2011:

	Three months ended June 30, 2012			Three months ended June 30, 2011			Nine months ended June 30, 2012			Nine months ended June 30, 2011
Beginning balance:	$	(18,859	)	$	(16,337	)	$	(11,126	)	$	—
Realized / unrealized gain (loss) on cross currency swaps		5,009			1,948			(2,724	)		(14,389	)
Ending balance:	$	(13,850	)	$	(14,389	)	$	(13,850	)	$	(14,389	)

Interest Rate Swaps

        To manage the potential risk arising from changing interest rates and their impact on long-term debt, our policy is to maintain a combination of available fixed and variable rate financial instruments. During December 2010, we entered into three interest rate swap contracts that were subsequently terminated in connection with the Refinancing, resulting in a termination payment of $1,525. During March 2011, we entered into three interest rate swap contracts to fix the LIBOR indexed interest rates on a portion of our senior credit facilities until the indicated expiration dates of these swap contracts. Each swap contract has an initial notional amount of $333,333 (for a total of one billion dollars), with a fixed interest rate of 1.92% for a four-year term. The notional amount of each swap decreases to $266,666 in December 2012, decreases to $166,666 in December 2013 and has a maturity date of December 2014. Under the terms of the swap contracts, variable interest payments for a portion of our senior credit facilities are swapped for fixed interest payments. These interest rate swap contracts were designated as a cash flow hedge of the variable interest payments on a portion of our term loan debt. We assess hedge effectiveness based on the overall changes in the fair value of the interest rate swap contracts. We measure any potential ineffectiveness using the hypothetical derivative method, and any ineffectiveness will be recognized in current earnings. Hedge ineffectiveness from inception to June 30, 2012 was insignificant.

Cross Currency Swaps

        To manage the potential exposure from adverse changes in currency exchange rates, specifically the British pound, arising from our net investment in British pound denominated operations, we entered into three cross currency swap contracts in December 2010. The aggregate notional amount of the swap contracts is £194,200 (approximately $305,000), with a forward rate of 1.565, and a termination date of September 30, 2017.

        These cross currency contracts were designated as a net investment hedge to the net investment in our British pound denominated operations. We assess hedge effectiveness based on the overall changes in the fair value of the cross currency swap contracts. We measure potential hedge ineffectiveness using the hypothetical derivative method and is recognized in miscellaneous, net in the accompanying statements of operations. Hedge ineffectiveness for the three and nine months ended June 30, 2012 resulted in an expense of $1,524 and $2,516, respectively, and for the three and nine months ended June 30, 2011, hedge ineffectiveness was insignificant.

        The following table shows the effect of our derivative instruments designated as cash flow and net investment hedging instruments for the three and nine months ended June 30, 2012:

	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)			Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income			Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)			Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income
	Three months ended June 30, 2012			Three months ended June 30, 2012			Nine months ended June 30, 2012			Nine months ended June 30, 2012
Cash Flow Hedges:
Interest rate swaps	$	(1,814	)	$	(2,319	)	$	(5,445	)	$	(6,982	)
Net Investment Hedges:
Cross currency swaps	$	3,845		$	—		$	(128	)	$	—
Total	$	2,031		$	(2,319	)	$	(5,573	)	$	(6,982	)

Notes

        The fair value of the Notes, based on then quoted market prices, was approximately $717,000 on June 30, 2012, which is considered to be a Level 2 fair value.

Assets Re-measured at Fair Value on a Non-recurring Basis

        In connection with the UK Administration (See note 1), we re-measured the Julian Graves Tradename and certain fixed assets using Level 3 inputs, which resulted in an impairment of $20,106.