Metro PCS 2010 Annual Report Download - page 120

MetroPCS Communications, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2010, 2009 and 2008
F-14
5. Derivative Instruments and Hedging Activities:
In March 2009, MetroPCS Wireless, Inc. (“Wireless”) entered into three separate two-year interest rate protection
agreements to manage the Company’s interest rate risk exposure under Wireless’ senior secured credit facility, as
amended (the “Senior Secured Credit Facility”), pursuant to which Wireless may borrow up to approximately $1.7
billion. These agreements were effective on February 1, 2010 and cover a notional amount of $1.0 billion and
effectively convert this portion of Wireless’ variable rate debt to fixed rate debt at a weighted average annual rate of
5.246%. These agreements expire on February 1, 2012.
On October 13, 2010, Wireless entered into three separate two-year interest rate protection agreements to manage
its interest rate risk exposure under its Senior Secured Credit Facility. These agreements will be effective on
February 1, 2012 and will cover a notional amount of $950.0 million and effectively convert this portion of
Wireless’ variable rate debt to fixed rate debt at a weighted average annual rate of 4.612%. The monthly interest
settlement periods will begin on February 1, 2012. These agreements expire on February 1, 2014.
Interest rate protection agreements are entered into to manage interest rate risk associated with Wireless’ variable-
rate borrowings under the Senior Secured Credit Facility. The interest rate protection agreements have been
designated as cash flow hedges. If a derivative is designated as a cash flow hedge and the hedging relationship
qualifies for hedge accounting under the provisions of ASC 815, the effective portion of the change in fair value of
the derivative is recorded in accumulated other comprehensive income (loss) and reclassified to interest expense in
the period in which the hedged transaction affects earnings. The ineffective portion of the change in fair value of a
derivative qualifying for hedge accounting is recognized in earnings in the period of the change. For the year ended
December 31, 2010, the change in fair value did not result in ineffectiveness.
At the inception of the cash flow hedges and quarterly thereafter, the Company performs an assessment to
determine whether changes in the fair values or cash flows of the derivatives are deemed highly effective in
offsetting changes in the fair values or cash flows of the hedged transaction. If at any time subsequent to the
inception of the cash flow hedges, the assessment indicates that the derivative is no longer highly effective as a
hedge, the Company will discontinue hedge accounting and recognize all subsequent derivative gains and losses in
results of operations. The Company estimates that approximately $17.5 million of net losses that are reported in
accumulated other comprehensive loss at December 31, 2010 are expected to be reclassified into earnings within the
next 12 months.
Cross-default Provisions
Wireless’ interest rate protection agreements contain cross-default provisions to its Senior Secured Credit
Facility. Wireless’ Senior Secured Credit Facility allows interest rate protection agreements to become secured if
the counterparty to the agreement is a current lender under the facility. If Wireless were to default on the Senior
Secured Credit Facility, it would trigger these provisions, and the counterparties to the interest rate protection
agreements could request immediate payment on interest rate protection agreements in net liability positions, similar
to their existing rights as a lender. There are no collateral requirements in the interest rate protection agreements.
The aggregate fair value of interest rate protection agreements with cross-default provisions that are in a net liability
position on December 31, 2010 is $18.7 million.