This excerpt taken from the NCS 10-Q filed Jun 11, 2009.
Interest Rate Risk
We are exposed to interest rate risk associated with fluctuations in the interest rates on our variable interest rate debt. In order to manage this risk, on June 15, 2006, we entered into a forward interest rate swap agreement (Swap Agreement) hedging a portion of our $400 million term loan due June 2010 with a notional amount of $160 million beginning October 11, 2006. The notional amount decreased to $145 million on October 11, 2007 and decreased again to $105 million on October 14, 2008. The notional amount will further decrease to $65 million on October 13, 2009. The term of the Swap Agreement is four years. Under the Swap Agreement, we will pay a fixed rate of 5.55% on a quarterly basis in exchange for receiving floating rate payments based on the three-month LIBOR rate. We formally document qualifying hedge transactions and hedging instruments, and assess, both at inception of the contract and on an ongoing basis, whether the hedging instrument is effective in offsetting changes in cash flows of the hedged transaction. The fair value of the Swap Agreement as of May 3, 2009 and November 2, 2008, was a liability of approximately $4.1 million and $3.9 million, respectively. The fair value excludes accrued interest and takes into consideration current interest rates and current creditworthiness of us or the counterparty, as applicable.
Subsequent to the first quarter, we concluded our interest rate swap is no longer an effective hedge and, in the current and prospective periods, until the underlying cash flows relating to the senior secured credit facility again become probable, the changes in the fair value of the hedge are recorded in earnings. For the three months ended May 3, 2009, we have reduced interest expense by $0.8 million as a result of the changes in fair value of the hedge. If we are unable to refinance our underlying debt and can not redesignate the interest rate swap as an effective hedge, such event would result in us permanently losing the hedge effectiveness of the interest rate swap.
The maximum length of time over which we are hedging or exposure to the variability of future cash flows related to forecasted interest payments through our Swap Agreement is though June 2010. Over the next 12 months, we expect to reclassify $3.5 million of deferred losses from accumulated other comprehensive income to interest expense as related interest payment to the designated interest rate swap recognized. During the three months ended May 3, 2009, we reclassified $0.9 million into earnings as a result of the discontinuance of the hedge designation of the Swap Agreement.
At May 3, 2009 and November 2, 2008, the fair value carrying amount of our derivative instrument was recorded as follows (in thousands):
The effect of derivative instruments on the Condensed Consolidated Statement of Income (Loss) for the three months ended May 3, 2009 and April 27, 2008 was as follows (in thousands):
The effect of derivative instruments on the Condensed Consolidated Statement of Income (Loss) for the six months ended May 3, 2009 and April 27, 2008 was as follows (in thousands):
At May 3, 2009 and November 2, 2008, accumulated other comprehensive income (loss) associated with the Swap Agreement previously qualifying for hedge accounting treatment was $(2.4) million and $(2.4) million, respectively, net of income tax effects.