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v2.4.0.6
Derivative Instruments and Fair Value Measurements
9 Months Ended
Sep. 30, 2012
Derivative Instruments and Fair Value Measurements [Abstract]  
Derivative Instruments and Fair Value Measurements [Text Block]

Note 5. Derivative Instruments and Fair Value Measurements

 

Interest-Rate Swaps

 

The Company has entered into interest rate swaps to effectively convert a portion of its debt from a floating to a fixed-rate basis. Under these swap contracts, exclusive of applicable margins, the Company will pay fixed rate interest and receive floating-rate interest amounts based on three-month LIBOR settings. The swaps are designated and qualify as cash flow hedges. The following table summarizes the interest rate swaps in place as of September 30, 2012 and December 31, 2011.

 

Notional Amount
Outstanding – 
September 30, 2012
    Notional Amount
Outstanding – 
December 31, 2011
    Fixed Rate     Maturity  
$     $ 36,752,038       5.225 %     08/2012  
  81,500,000       81,500,000       3.895 %     01/2013  
  84,800,000       84,800,000       3.900 %     09/2013  
$ 166,300,000     $ 203,052,038                  

 

The Company records the fair value of the interest rate swaps as an asset or liability on its balance sheet. The effective portion of the swap is recorded in accumulated other comprehensive income. No portion of the cash flow hedges was ineffective during the period ended September 30, 2012. Accordingly, liabilities of $4,498,027 and $9,486,116 have been recorded in Fair value of derivative instruments in the Company’s balance sheets as of September 30, 2012 and December 31, 2011, respectively.

 

Forward freight agreements, bunker swaps and freight derivatives

 

The Company trades in forward freight agreements (“FFAs”), bunker swaps and freight derivatives markets, with the objective of utilizing these markets as economic hedging instruments that reduce the risk of specific vessels to changes in the freight market and/or bunker costs. The Company’s FFAs, bunker swaps and freight derivatives have not qualified for hedge accounting treatment.

 

The effect of cash flow hedging relationships on the balance sheets as of September 30, 2012 and December 31, 2011, and the statement of operations for the periods ended September 30, 2012 and 2011 are as follows:

 

The effect of designated derivative instruments on the consolidated balance sheets:

 

    Amount of Loss Recognized in AOCI on Derivative
(Effective Portion)
 
Derivatives designated for cash flow hedging relationships   September 30, 2012     December 31, 2011  
             
Interest rate swaps   $ (4,498,027 )   $ (9,486,116 )
                 
Total   $ (4,498,027 )   $ (9,486,116 )

 

The effect of non-designated derivative instruments on statements of operations:

 

Derivatives not designated 
as hedging instruments
      Amount of Gain /(Loss)     Amount of Gain/(Loss)  
        Three Months Ended     Nine Months Ended  
    Location of Gain (Loss) Recognized   September 30,
2012
    September 30,
2011
    September 30,
2012
    September 30,
2011
 
FFAs, bunker swaps, freight and bunker derivatives   Other income   $     $ (1,333,482 )   $ 1,028,375     $ (359,573 )
Total       $     $ (1,333,482 )   $ 1,028,375     $ (359,573 )

 

Cash Collateral Disclosures

 

The Company does not offset fair value amounts recognized for derivatives by the right to reclaim cash collateral or the obligation to return cash collateral. The amount of collateral to be posted is defined by the terms of the respective master agreement executed with counterparties or exchanges and is required when agreed upon threshold limits are exceeded. At September 30, 2012, the Company’s collateral related to its FFAs, bunker swaps and freight derivative transactions was zero. As of September 30, 2012, the Company had no outstanding amounts paid as collateral to derivative fair value positions.

 Fair Value Measurements

 

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

 

Cash, cash equivalents and restricted cash—the carrying amounts reported in the consolidated balance sheet for interest-bearing deposits approximate their fair value due to their short-term nature thereof.

 

Debt—the carrying amounts of borrowings under the revolving credit agreement approximate their fair value, due to the variable interest rate nature thereof.

 

Interest rate swaps—the fair value of interest rate swaps (used for hedging purposes) is the estimated amount that the Company would receive or pay to terminate the swaps at the reporting date.

 

Forward freight agreements (FFAs)—the fair value of FFAs is determined based on quoted rates.

 

Freight and bunker derivative instruments—the fair value of freight and bunker derivative contracts is the estimated amount that the Company would receive or pay to terminate the option contracts at the reporting date.

 

Bunker swaps—the fair value of bunker swaps is the estimated amount that the Company would receive or pay to terminate the swaps at the reporting date.

 

The Company defines fair value, establishes a framework for measuring fair value and provides disclosures about fair value measurements. The fair value hierarchy for disclosure of fair value measurements is as follows:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities. Our Level 1 non-derivatives include cash, money-market accounts and restricted cash accounts.

Level 2 – Quoted prices for similar assets and liabilities in active markets or inputs that are observable. Our Level 2 non-derivatives include our term loan account.

Level 3 – Inputs that are unobservable (for example cash flow modeling inputs based on assumptions).

 

The following table presents information about our assets and liabilities measured at fair value on a recurring basis as of September 30, 2012 and December 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fell:

 

    September 30, 2012     December 31, 2011  
    Level 1     Level 2     Level 3     Level 1     Level 2     Level 3  
Assets:                                                
Bunker swaps                     $ 142,750              
Bunker derivative instruments                           $ 261,000        
Liabilities:                                                
Interest rate swaps         $ 4,498,027                 $ 9,486,116        
Bunker swaps                     $ 53,000              
Bunker derivative instruments                           $ 104,640