Derivatives and Hedging Activities

6 Months Ended

Jun. 30, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Hedging Activities

Risk Management Objective

The Company may use derivative financial instruments, including interest rate swaps, caps, options, floors and other interest rate derivative contracts, to hedge all or a portion of the interest rate risk associated with its borrowings. Certain foreign investments expose the Company to fluctuations in foreign interest rates and exchange rates. These fluctuations may impact the value of the Company’s cash receipts and payments in terms of the Company’s functional currency. The Company enters into derivative financial instruments to protect the value or fix the amount of certain obligations in terms of its functional currency, the U.S. dollar ("USD").

The principal objective of such arrangements is to minimize the risks and/or costs associated with the Company’s operating and financial structure as well as to hedge specific anticipated transactions. The Company does not intend to utilize derivatives for speculative or other purposes other than interest rate and currency risk management. The use of derivative financial instruments carries certain risks, including the risk that the counterparties to these contractual arrangements are not able to perform under the agreements. To mitigate this risk, the Company only enters into derivative financial instruments with counterparties with high credit ratings and with major financial institutions with which the Company and its related parties may also have other financial relationships. The Company does not anticipate that any of the counterparties will fail to meet their obligations.

The table below presents the fair value of the Company's derivative financial instruments as well as their classification on the balance sheets as of June 30, 2016 and December 31, 2015:



(In thousands)	Balance Sheet Location	June 30, 2016			December 31, 2015
Derivatives designated as hedging instruments:
Cross currency swaps (EUR-USD)	Derivative assets, at fair value	$	562		$	3,632
Cross currency swaps (EUR-USD)	Derivative liabilities, at fair value	(7		)	—
Cross currency swaps (GBP-USD)	Derivative assets, at fair value	11,782			3,776
Foreign currency forwards (EUR-USD)	Derivative assets, at fair value	370			490
Interest rate swaps (GBP)	Derivative assets, at fair value	—			190
Interest rate swaps (GBP)	Derivative liabilities, at fair value	(1,957		)	(166		)
Interest rate swaps (EUR)	Derivative liabilities, at fair value	(1,221		)	(1,751		)
Total		$	9,529		$	6,171
Derivatives not designated as hedging instruments:
Foreign currency forwards (GBP-USD)	Derivative assets, at fair value	$	153		$	55
Foreign currency forwards (EUR-USD)	Derivative assets, at fair value	1			22
Foreign currency forwards (EUR-USD)	Derivative liabilities, at fair value	(24		)	(10		)
Cross currency swaps (EUR-USD)	Derivative assets, at fair value	623			—
Interest rate swaps (EUR)	Derivative liabilities, at fair value	(2,802		)	—
Total		$	(2,049	)	$	67

The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company's derivatives as of June 30, 2016 and December 31, 2015. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the accompanying consolidated balance sheets.



										Gross Amounts Not Offset on the Balance Sheet
Derivatives (In thousands)	Gross Amounts of Recognized Assets		Gross Amounts of Recognized (Liabilities)			Gross Amounts Offset on the Balance Sheet		Net Amounts of Assets (Liabilities) presented on the Balance Sheet		Financial Instruments		Cash Collateral Received (Posted)		Net Amount
June 30, 2016	$	13,491	$	(6,011	)	$	—	$	7,480	$	—	$	—	$	7,480
December 31, 2015	$	8,165	$	(1,927	)	$	—	$	6,238	$	—	$	—	$	6,238

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps. Interest rate swaps designated as cash flow hedges involve the receipt of variable-rate amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2016, such derivatives were used to hedge the variable cash flows associated with variable-rate debt. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. During the three months ended June 30, 2016, the Company recorded no gains (losses) of ineffectiveness in earnings. During the six months ended June 30, 2016, the Company recorded losses of $0.1 million of hedge ineffectiveness in earnings. During the three and six months ended June 30, 2015, the Company recorded gains of $18,000 of hedge ineffectiveness in earnings.

Amounts reported in accumulated other comprehensive income (loss) related to derivatives will be reclassified to interest expense as interest payments are made on the Company's variable-rate debt. During the next 12 months, the Company estimates that an additional $1.6 million will be reclassified from other comprehensive income (loss) as an increase to interest expense.

The table below details the location in the financial statements of the gain or loss recognized on interest rate derivatives designated as cash flow hedges for the three and six months ended June 30, 2016 and June 30, 2015:



	Three Months Ended June 30,						Six Months Ended June 30,
(In thousands)	2016			2015			2016			2015
Amount of gain (loss) recognized in accumulated other comprehensive income (loss) on interest rate derivatives (effective portion)	$	7,562		$	(504	)	$	2,991		$	2,364
Amount of loss reclassified from accumulated other comprehensive income (loss) into income as interest expense (effective portion)	$	(343	)	$	(80	)	$	(905	)	$	(98	)
Amount of gain (loss) recognized in income on derivative instruments (ineffective portion, reclassifications of missed forecasted transactions and amounts excluded from effectiveness testing)	$	—		$	18		$	(56	)	$	18

As of June 30, 2016 and December 31, 2015, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:



	June 30, 2016			December 31, 2015
Derivatives	Number of Instruments	Notional Amount		Number of Instruments	Notional Amount
		(In thousands)			(In thousands)
Interest rate swaps (EUR)	4	$	61,078	8	$	169,604
Interest rate swaps (GBP)	3	97,782		3	116,374
Total	7	$	158,860	11	$	285,978

During the three and six months ended June 30, 2016, the Company terminated certain active interest rate swaps and as a result the Company accelerated the reclassification of zero and $0.2 million of losses from other comprehensive income (loss) to earnings as a result of the hedged forecasted transactions becoming probable not to occur.

Net Investment Hedges

The Company is exposed to fluctuations in foreign exchange rates on property investments in foreign countries which pay rental income, property related expenses and hold debt instruments in currencies other than its functional currency. The Company uses foreign currency derivatives including cross currency swaps to hedge its exposure to changes in foreign exchange rates on certain of its foreign investments. Cross currency swaps involve fixing the applicable currency exchange rate for delivery of a specified amount of foreign currency on specified dates. For derivatives designated as net investment hedges, the effective portion of changes in the fair value of the derivatives are reported in accumulated other comprehensive income (loss) (outside of earnings) as part of the cumulative translation adjustment. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. Amounts are reclassified out of accumulated other comprehensive income (loss) into earnings when the hedged net investment is either sold or substantially liquidated.

On March 11, 2016, the Company terminated and repaid all outstanding amounts under the Credit Facility which were designated as net investment hedges of the Company's investments during the periods reflected in the consolidated statements of operations and comprehensive loss. Foreign currency advances under the Company's Credit Facility were utilized to fund individual real estate investments in the respective local currency. Foreign denominated draws under the Credit Facility were designated as net investment hedges through the repayment date of March 11, 2016, which created a natural hedge against the equity invested, removing the need for final currency swaps. As of March 11, 2016, total foreign currency advances under the Credit Facility were approximately $28.4 million, which reflects advances of £11.2 million ($16.1 million based upon an exchange rate of £1.00 to $1.43 as of March 11, 2016) and advances of €11.0 million ($12.3 million based upon an exchange rate of €1.00 to $1.12, as of March 11, 2016). The Company did not record any gains (losses) for the three and six months ended June 30, 2016 and 2015 due to currency changes on the undesignated excess of the foreign currency advances over the related net investments.

On March 11, 2016, in connection with the repayment of the Credit Facility, the Company partially terminated a cross currency swap. The hedge instruments had been designated as net investment hedges through that date. The partial settlement of the cross currency swap resulted in a gain of approximately $1.0 million, of which $1.0 million was retained by the bank as a reduction to the Credit Facility. The gain will remain in the other comprehensive income (loss) until such time as the net investments are sold or substantially liquidated in accordance with ASC 830.

In addition, the Company entered into the Mezzanine Facility through a foreign subsidiary with EUR functional currency. The Mezzanine Facility allows for draws in both EUR and GBP denominated amounts. As of June 30, 2016, the Company has drawn foreign currency advances under its Mezzanine Facility to refinance certain secondary mortgages as well as fund individual real estate investments in GBP and EUR. Effective January 4, 2016, all non-functional GBP draws under the Mezzanine Facility were designated as net investment hedges, which created a natural hedge against the GBP equity invested, removing the need for final currency swaps. As of June 30, 2016, total GBP advances under the Mezzanine Facility were approximately €47.0 million (or $52.1 million), which reflects advances of £38.9 million (based upon an exchange rate of £1.00 to €1.21 as of June 30, 2016). The Company recorded gains (losses) of $0.1 million and $(0.1) million for the three and six months ended June 30, 2016, respectively, due to currency changes on the undesignated excess of the foreign currency advances over the related net investments.

As of June 30, 2016 and December 31, 2015, the Company had the following outstanding foreign currency derivatives that were used to hedge its net investments in foreign operations:



	June 30, 2016			December 31, 2015
Derivatives	Number of Instruments	Notional Amount		Number of Instruments	Notional Amount
		(In thousands)			(In thousands)
Cross currency swaps (EUR-USD)	3	$	40,067	4	$	53,998
Cross currency swaps (GBP-USD)	1	65,788		1	72,725
Foreign currency forwards (EUR-USD)	1	10,100		1	10,100
Total	5	$	115,955	6	$	136,823

Non-Designated Hedges

The Company is exposed to fluctuations in the exchange rates of its functional currency, the USD, against the Pound Sterling ("GBP") and the Euro ("EUR"). The Company uses foreign currency derivatives including currency forward and cross currency swap agreements to manage its exposure to fluctuations in GBP-USD and EUR-USD exchange rates. While these derivatives are hedging the fluctuations in foreign currencies, they do not meet the strict hedge accounting requirements to be classified as hedging instruments. Changes in the fair value of derivatives not designated as hedges under qualifying hedging relationships are recorded directly in earnings. The Company recorded marked-to-market losses of $0.3 million and $0.7 million on the non-designated derivatives for the three and six months ended June 30, 2016, respectively. The Company recorded losses of $48,000 on the non-designated derivatives for the three and six months ended June 30, 2015.

As of June 30, 2016 and December 31, 2015, the Company had the following outstanding derivatives that were not designated as hedges under qualifying hedging relationships.



	June 30, 2016			December 31, 2015
Derivatives	Number of Instruments	Notional Amount		Number of Instruments	Notional Amount
		(In thousands)			(In thousands)
Foreign currency forwards (GBP-USD)	7	$	812	9	$	1,044
Foreign currency forwards (EUR-USD)	10	1,780		12	2,136
Cross currency swaps (EUR-USD)	1	14,911		—	—
Interest rate swaps (EUR)	3	99,390		—	—
Total	21	$	116,893	21	$	3,180

Prior to January 4, 2016, non-functional foreign currency advances under the Mezzanine Facility were not designated as net investment hedges and, accordingly, the changes in value due to currency fluctuations were reflected in earnings. As a result, the Company recorded remeasurement gains on the GBP denominated draws of $1.7 million for the year ended December 31, 2015.

Credit-risk-related Contingent Features

The Company has agreements with each of its derivative counterparties that contain provisions whereby if the Company either defaults or is capable of being declared to be in default on any of its indebtedness, then the Company could also be declared to be in default on its derivative obligation.

As of June 30, 2016, the fair value of derivatives in a net liability position including accrued interest but excluding any adjustment for nonperformance risk related to these agreements was $6.5 million. As of June 30, 2016, the Company has not posted any collateral related to these agreements and was not in breach of any agreement provisions. If the Company had breached any of these provisions, it could have been required to settle its obligations under the agreements at their aggregate termination value.

- Definition

The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 30
-Section 45
-Paragraph 1
-URI http://asc.fasb.org/extlink&oid=6441202&loc=d3e80720-113993

Reference 2: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 10
-Section 50
-Paragraph 4C
-URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624171-113959

Reference 3: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 10
-Section 50
-Paragraph 2
-URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41620-113959

Reference 4: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 10
-Section 50
-Paragraph 4B
-URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624163-113959

Reference 5: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 10
-Section 50
-Paragraph 1
-URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5579240-113959

Reference 6: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 10
-Section 50
-Paragraph 4D
-URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624177-113959

Reference 7: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 30
-Section 50
-Paragraph 2
-URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80784-113994

Reference 8: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 10
-Section 50
-Paragraph 5
-URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41641-113959

Reference 9: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 10
-Section 50
-Paragraph 1A
-URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5579245-113959

Reference 10: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 10
-Section 50
-Paragraph 4H
-URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624258-113959

Reference 11: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 30
-Section 50
-Paragraph 1
-URI http://asc.fasb.org/extlink&oid=35736893&loc=d3e80748-113994

Reference 12: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 10
-Section 50
-Paragraph 4K
-URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5708775-113959

Reference 13: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 10
-Section 50
-Paragraph 4J
-URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5708773-113959

Reference 14: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 10
-Section 50
-Paragraph 4A
-URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5618551-113959

Reference 15: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 10
-Section 50
-Paragraph 1B
-URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5580258-113959

Reference 16: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 10
-Section 50
-Paragraph 4E
-URI http://asc.fasb.org/extlink&oid=64837297&loc=SL5624181-113959

Reference 17: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 25
-Section 50
-Paragraph 1
-URI http://asc.fasb.org/extlink&oid=6886632&loc=d3e76258-113986

Reference 18: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 815
-SubTopic 10
-Section 50
-Paragraph 4
-URI http://asc.fasb.org/extlink&oid=64837297&loc=d3e41638-113959

Reference 19: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 235
-SubTopic 10
-Section S99
-Paragraph 1
-Subparagraph (SX 210.4-08.(n))
-URI http://asc.fasb.org/extlink&oid=26873400&loc=d3e23780-122690

+ Details

American Realty Capital Global Trust II, Inc. 10-Q