Derivative Instruments |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2011 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Derivative Instruments [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| DERIVATIVE INSTRUMENTS |
The Company is subject to interest rate risk to the extent we borrow against credit
facilities with variable interest rates as described above. The Company has potential
interest rate exposure with respect to the $33.0 million original outstanding balance on our
variable rate term loan. During January 2011, the Company reduced its exposure to changes
in interest rates by entering into an interest rate swap agreement (“Swap”) with Wells Fargo
Bank, N.A., which became effective on April 1, 2011. The Swap contract exchanges a floating
rate for fixed interest payments periodically over the life of the Swap without exchange of
the underlying $20.0 million notional amount. The interest payments under the Swap are
settled on a net basis. The notional amount of the Swap is used to measure interest to be
paid or received and does not represent the amount of exposure to credit loss. Our credit
risk related to the Swap is considered low because the agreement is with a creditworthy
financial institution. The Company does not hold or issue derivative financial instruments
for trading purposes.
The Swap became effective April 1, 2011 and continues through April 1, 2016. The Company
paid interest at a fixed rate of 1.9% on the notional amount of $20.0 million, which is
reduced by $1.0 million quarterly in July, October, January and April of each year. The
terms of the initial interest rate swap agreement also required Wells Fargo Bank to pay
based upon the variable LIBOR rate. The net interest payments, based on the notional
amount, match the timing of the related liabilities. The initial Swap was designated as a
hedge for accounting purposes under ASC Topic 815, “Derivatives and Hedging.” The Company
recognized the derivative as a liability on the balance sheet and is included in long-term
debt, and marked the derivative to fair value through the income statement income as a fair
value adjustment of the derivative.
During September 2011, the Company amended and restated the initial swap agreement with
Wells Fargo Bank, effective September 1, 2011. All prior terms and conditions related to
the swap agreement remained the same, with the exception of the floating rate payable by
Wells Fargo Bank on the swap, which has been modified to include a floor rate of 1.5%, where
if the relevant rate (variable LIBOR rate defined above) is equal to or less than 1.5%, the
floating rate shall be 1.5%. The newly established floor rate on the swap coincides with
the minimum variable rate stated for the related hedged debt. In addition, the fixed rate
payable to Wells Fargo Bank for the re-designated swap was increased from 1.9% to 3.06% and
is expected over the life of the swap to modestly reduce the overall cost of the instrument.
The re-designated Swap was designated as a hedge for accounting purposes under ASC Topic
815, “Derivatives and Hedging.” The Company will continue to recognize the derivative as a liability on the balance sheet, included in
long-term debt, and marked the derivative to fair value through the income statement income
as a fair value adjustment of the derivative.
During the quarter ended September 30, 2011, the Company paid interest on the hedged portion
of the debt ($19 million) at an average net rate of 8.64%, and paid interest on the
non-hedged portion of the debt ($13 million) at a rate of 7.0%. The weighted average
interest rate paid on the debt is 7.95%, including swap interest and loan interest.
The following table presents the historical fair value of the interest rate swaps recorded
in the accompanying condensed consolidated balance sheets as of September 30, 2011. The
Company had no interest swap agreements during the fiscal year ended December 31, 2010.
Fair Value
Fair value approximates the amount we would pay if these contracts were settled at the
respective valuation dates. Fair value is recognized based on estimates provided by Wells
Fargo Bank, which are based upon current, and predictions of future, interest rate levels
along a yield curve, the remaining duration of the instruments and other market conditions,
and therefore, is subject to significant estimation and a high degree of variability and
fluctuation between periods. The fair value is adjusted, to reflect the impact of credit
ratings of the counterparties or the Company, as applicable. These adjustments resulted in a
reduction in the fair values as compared to their settlement values.
The net effect of our floating-to-fixed interest rate swap resulted in an increase in
interest expense of $79,714 for the three months ended September 30, 2011 and $163,131 for
the nine months ended September 30, 2011 as compared to the contractual rate of the
underlying hedged debt for the period. During the three and nine months ended September 30,
2011, due to the derivative not being designated as a hedging instrument, we recognized a
loss on the change in the fair value of the swap of $588,069.
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||