Ecovyst, Inc. Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Financial Instruments

Financial Instruments

9 Months Ended

Sep. 30, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

14. Financial Instruments:

The Company uses interest rate related derivative instruments to manage its exposure to changes in interest rates on its variable-rate debt instruments. The Company does not speculate using derivative instruments.

By using derivative financial instruments to hedge exposures to changes in interest rates, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is an asset, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is a liability, the Company owes the counterparty and therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high quality counterparties. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features.

Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates. The market risk associated with the Company’s derivative instruments is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.

Use of Derivative Financial Instruments to Manage Interest Rate Risk. The Company is exposed to fluctuations in interest rates on its senior secured credit facilities. Changes in interest rates will not affect the market value of such debt but will affect the Company’s interest payments over the term of the loans. Likewise, an increase in interest rates could have a material impact on the Company’s cash flow. The Company hedges the interest rate fluctuations on debt obligations through interest rate cap agreements. The Company records these agreements at fair value as assets or liabilities in its consolidated balance sheet. As the derivatives are designated and qualify as cash flow hedges, the gains or losses on the interest rate cap agreements are recorded in stockholders’ equity as a component of OCI, net of tax. Reclassifications of the gains and losses on the interest rate cap agreements into earnings are recorded as part of interest expense in the condensed consolidated statements of income as the Company makes its interest payments

on the hedged portion of its senior secured credit facilities. Fair value is determined based on estimated amounts that would be received or paid to terminate the contracts at the reporting date based on quoted market prices.

In November 2018, the Company entered into interest rate cap agreements to mitigate interest volatility from July 2020 through July 2022, with a cap rate of 3.50% on $500,000 of notional variable-rate debt and a $3,380 premium annuitized during the effective period. In February 2020, the Company restructured its $500,000 of notional variable-rate debt interest rate cap agreements from July 2020 through July 2022, to lower the interest cap rate to 2.50% with an incremental $130 premium annuitized during the effective period. In March 2020, the Company again amended such interest rate cap agreements to lower the cap rate to 0.84% from 2.50% on $500,000 of notional variable-rate debt and paid an additional incremental $900 premium annuitized during the effective period. The term remains unchanged from July 2020 through July 2022. The total cumulative annuitized premium on the $500,000 of notional variable-rate debt is $4,410. The cap rate in effect at September 30, 2021 was 0.84% associated with the $500,000 of notional variable-rate debt.

In July 2020, the Company entered into additional interest rate cap agreements to mitigate interest rate volatility from August 2020 to August 2023, with a cap rate of 1.00% on $400,000 of notional variable-rate debt. The cap rate in effect at September 30, 2021 was 1.00% associated with the $400,000 of notional variable-rate debt.

In August 2021, PQ Corporation novated $900,000 of its interest rate caps to Ecovyst Catalyst Technologies LLC. Other than the novation, there were no other changes to the interest rate cap.

Use of Derivative Financial Instruments to Manage Foreign Currency Risk. The Company is exposed to risks related to its net investments in foreign operations due to fluctuations in foreign currency exchange rates, particularly between the United States dollar and the Euro. In February 2018, the Company entered into multiple cross-currency interest rate swap arrangements with an aggregate notional amount of €280,000 to hedge this exposure on the net investments of certain of its Euro-denominated subsidiaries in its Performance Materials and Performance Chemicals businesses. The Company recorded these swap agreements at fair value as assets or liabilities in its consolidated balance sheet. As the derivatives are designated and qualify as net investment hedges, changes in the fair value of the swaps attributable to changes in the spot exchange rates are recognized in cumulative translation adjustment (“CTA”) within OCI and are held there until the hedged net investments are sold or substantially liquidated. Upon such sale or liquidation, the amount recognized in CTA is reclassified to earnings and reported in the same line item as the gain or loss on the liquidation of the net investments. Changes in the fair value of the swaps attributable to the cross-currency basis spread are excluded from the assessment of hedge effectiveness and are recorded in current period earnings.

In March 2021, as a result of the divestitures of the Performance Materials and Performance Chemicals businesses, the Company settled its cross-currency swaps. At the date of settlement, the total notional value of the cross-currency swaps was $311,380. The Company paid $13,170 in cash to settle the swaps, which is included in net cash used in investing activities, discontinued operations in the Company’s condensed consolidated statement of cash flows for the nine months ended September 30, 2021, as the underlying subsidiary subject to the net investment hedging relationship is part of the Performance Chemicals business.

The fair values of derivative instruments held as of September 30, 2021 and December 31, 2020 are shown below:


	Balance sheet location	September 30, 2021		December 31, 2020
Derivative assets:
Derivatives designated as cash flow hedges:



Interest rate caps	Other long-term assets	$	189	$	—






Total derivative assets		$	189	$	—
Derivative liabilities:
Derivatives designated as cash flow hedges:

Interest rate caps	Accrued liabilities	$	1,937	$	1,954

Interest rate caps	Other long-term liabilities	—		1,750



Total derivative liabilities		$	1,937	$	3,704

The following tables show the effect of the Company’s derivative instruments designated as cash flow hedges on AOCI for the three and nine months ended September 30, 2021 and 2020:


		Three months ended September 30,
		2021				2020
	Location of gain (loss) reclassified from AOCI into income	Amount of gain (loss) recognized in OCI on derivatives		Amount of gain (loss) reclassified from AOCI into income		Amount of gain (loss) recognized in OCI on derivatives		Amount of gain (loss) reclassified from AOCI into income
Interest rate caps	Interest (expense) income	$	510	$	(104)	$	573	$	506




		Nine months ended September 30,
		2021				2020
	Location of gain (loss) reclassified from AOCI into income	Amount of gain (loss) recognized in OCI on derivatives		Amount of gain (loss) reclassified from AOCI into income		Amount of gain (loss) recognized in OCI on derivatives		Amount of gain (loss) reclassified from AOCI into income
Interest rate caps	Interest (expense) income	$	1,901	$	(283)	$	(347)	$	(18)

The following tables show the effect of the Company’s cash flow hedge accounting on the condensed consolidated statements of income for the three and nine months ended September 30, 2021 and 2020:


	Location and amount of gain (loss) recognized in income on cash flow hedging relationships
	Three months ended September 30,
	2021				2020
	Cost of goods sold		Interest (expense) income		Cost of goods sold		Interest (expense) income
Total amounts of income and expense line items presented in the statement of income in which the effects of cash flow hedges are recorded	$	(113,784)	$	(9,005)	$	(89,844)	$	(10,430)

The effects of cash flow hedging:
Gain (loss) on cash flow hedging relationships:
Interest contracts:
Amount of gain (loss) reclassified from AOCI into income	—		(104)		—		506



	Location and amount of gain (loss) recognized in income on cash flow hedging relationships
	Nine months ended September 30,
	2021				2020
	Cost of goods sold		Interest (expense) income		Cost of goods sold		Interest (expense) income
Total amounts of income and expense line items presented in the statement of income in which the effects of cash flow hedges are recorded	$	(318,768)	$	(28,202)	$	(258,462)	$	(40,864)

The effects of cash flow hedging:
Gain (loss) on cash flow hedging relationships:
Interest contracts:
Amount of gain (loss) reclassified from AOCI into income	—		(283)		—		(18)

The amount of unrealized losses in AOCI related to the Company’s cash flow hedges that is expected to be reclassified to the condensed consolidated statement of income over the next twelve months is $805 as of September 30, 2021.

The following tables show the effect of the Company’s net investment hedges on AOCI and the condensed consolidated statements of income for the three and nine months ended September 30, 2021 and 2020:


	Amount of gain (loss) recognized in OCI on derivative				Location of gain (loss) reclassified from AOCI into income	Amount of gain (loss) reclassified from AOCI into income				Location of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)	Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)
	Three months ended September 30,					Three months ended September 30,					Three months ended September 30,
	2021		2020			2021		2020			2021		2020
Cross-currency interest rate swaps	$	—	$	(5,206)	Net (loss) income from discontinued operations, net of tax	$	9,754	$	—	Interest (expense) income	$	—	$	1,552

	Amount of pre-tax gain (loss) recognized in OCI on derivative				Location of gain (loss) reclassified from AOCI into income	Amount of gain (loss) reclassified from AOCI into income				Location of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)	Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)
	Nine months ended September 30,					Nine months ended September 30,					Nine months ended September 30,
	2021		2020			2021		2020			2021		2020
Cross-currency interest rate swaps	$	9,787	$	9,603	Net (loss) income from discontinued operations, net of tax	$	9,754	$	—	Interest (expense) income	$	545	$	3,244