FairPoint Communications 2009 Annual Report Download - page 130

Table of Contents
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The Company assesses interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely
impact expected future cash flows and by evaluating hedging opportunities. The Company maintains risk management control systems to monitor
interest rate cash flow risk attributable to both the Company's outstanding and forecasted debt obligations. The risk management control systems involve
the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on the Company's
future cash flows.
The Company uses variable and fixed-rate debt to finance its operations, capital expenditures and acquisitions. The variable-rate debt obligations
expose the Company to variability in interest payments due to changes in interest rates. The Company believes it is prudent to limit the variability of a
portion of its interest payments. To meet this objective, from time to time, the Company entered into interest rate swap agreements to manage
fluctuations in cash flows resulting from interest rate risk. The Swaps effectively changed the variable rate on the debt obligations to a fixed rate. Under
the terms of the Swaps, the Company was required to make a payment if the variable rate was below the fixed rate, or it received a payment if the
variable rate was above the fixed rate.
The Company failed to make payments of $14.0 million due under the Swaps on September 30, 2009, which failure resulted in an event of default
under the Swaps upon the expiration of a three business day grace period.
The filing of the Chapter 11 Cases constituted a termination event under the Swaps. Subsequent to the filing of the Chapter 11 Cases, the Company
received notification from the counterparties to the Swaps that the Swaps had been terminated. However, the Company believes that any efforts to
enforce payment obligations under such debt instruments are stayed as a result of the filing of the Chapter 11 Cases. See note 1.
In addition, as a result of the Restatement, the Company determined that the Company was not in compliance with the interest coverage ratio
maintenance covenant and the leverage ratio maintenance covenant under the Pre-petition Credit Facility for the measurement period ended June 30,
2009, which constituted an event of default under each of the Pre-petition Credit Facility and the Swaps, and may have constituted an event of default
under the Notes, in each case at June 30, 2009.
As a result of the Merger, the Company reassessed the accounting treatment of the Swaps and determined that, beginning on April 1, 2008, the
Swaps did not meet the criteria for hedge accounting. Therefore, the changes in fair value of the Swaps subsequent to the Merger have been recorded as
other income (expense) on the consolidated statement of operations. At December 31, 2009, the carrying value of the Swaps was a net liability of
approximately $98.8 million, all of which has been included in liabilities subject to compromise as a result of the filing of the Chapter 11 Cases. The
carrying value of the Swaps at December 31, 2009 represents the termination value of the Swaps as determined by the respective counterparties
following the event of default described above. The Company has recognized a $12.3 million gain on derivative instruments on the consolidated
statement of operations as a result of changes in the fair value of the Swaps during the year ended December 31, 2009. In addition, during the year
ended December 31, 2009, the Company has recognized a loss of approximately $10.3 million through reorganization items related to the termination of
the swaps as a result of the event of default described above.
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