Sunbeam 2005 Annual Report Download - page 63

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Jarden Corporation
Notes to Consolidated Financial Statements (cont’d)
December 31, 2005
In March 2003, the Company unwound a $75 million interest rate swap (“First Replacement Swap”) to
receive a fixed rate of interest and pay a variable rate of interest and contemporaneously entered into a new
$75 million interest rate swap (“Second Replacement Swap”). Like the swap that it replaced, the Second
Replacement Swap is a swap against the Notes. The variable rate of interest is based on six-month LIBOR
in arrears, plus a spread of 528 basis points.In return for unwinding the swap, the Company received $3.2
million of cash proceeds. Of this amount, approximately $1.0 million of proceeds related to accrued interest
that was owed to the Company at such time. The remaining $2.2 million of proceeds is being amortized
over the remaining life of the Notes as a credit to interest expense and the unamortized balances are
included in the Company’s Consolidated Balance Sheets as an increase to the value of the long-term debt.
The New Swap and Second Replacement Swap have been and, where applicable, are considered to be
effective hedges against changes in the fair value of our fixed-rate debt obligation for both tax and
accounting purposes. Accordingly, the interest rate swap contracts are reflected at fair value in the
Company’s Consolidated Balance Sheet and the related portion of fixed-rate debt being hedged is reflected
at an amount equal to the sum of its carrying value plus an adjustment representing the change in fair value
of the debt obligations attributable to the interest rate risk being hedged. The fair market value of these
interest rate swaps as of December 31, 2005 was against the Company in an amount of approximately $4.1
million and is included as a long-term liability in the Consolidated Balance Sheet, with a corresponding
offset to long-term debt. In addition, changes during any accounting period in the fair value of the interest
rate swaps, as well as offsetting changes in the adjusted carrying value of the related portion of fixed-rate
debt being hedged, will be recognized as adjustments to interest expense in the Company’s Consolidated
Statements of Income. The net effect of this accounting on the Company’s operating results is that interest
expense on the portion of fixed-rate debt being hedged is generally recorded based on variable interest
rates.
The Company is exposed to credit loss, in the event of non-performance by the other party to its
current existing swap, a large financial institution. However, the Company does not anticipate
non-performance by the other party.
Cash Flow Hedges
On November 22, 2005, the Company unwound all six of its outstanding interest rate swaps with
which the Company received a variable rate of interest and paid a fixed rate of interest and
contemporaneously entered into six new interest rate swaps (“Replacement Swaps”). The Replacement
Swaps have exactly the same terms and counterparties as the prior swaps except for the fixed rate of
interest that the Company pays. Similar to the swaps that they replaced, the Replacement Swaps converted
an aggregate of $625 million of floating rate interest payments (excluding the Company’s applicable
margin) under its term loan facility for a fixed obligation. The variable rate of interest is based on three-
month LIBOR.The fixed rates range from 4.73% to 4.805%. In return for unwinding the swaps, the
Company received $16.8 million of cash proceeds. The proceeds are being amortized over the remaining
life of the swaps as a credit to interest expense and the unamortized balances are included in the
Consolidated Balance Sheet as an increase to the carrying value of the long-term debt.
On July 18, 2005 the Company entered into two interest rate swaps (which were unwound in
November 2005 as described above) in connection with the closing of the THG Acquisition and the
issuance of additional variable interest term loan debt. These swaps convert an aggregate of $200 million
under the Term Loan for a fixed obligation. These swaps, each for $100 million of notional value, carry a
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