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, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

12. 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 condensed consolidated statements of cash flows. 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 condensed consolidated balance sheets. 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 other comprehensive income, 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.

The following table provides a summary of the Company’s interest rate cap agreements:


Financial instrument	Number of instruments	In effect as of September 30, 2023	Current notional amount of instruments in effect		Annuitized premium of instruments in effect
Interest rate cap	4	3	$	650,000	$	24,817

The current notional amounts of the three interest rate cap agreements in effect at September 30, 2023 are $250,000, $250,000 and $150,000. The Company entered into a $250,000 interest rate cap to mitigate interest rate volatility from August 2022 to October 2024, a $250,000 interest rate cap agreement to mitigate interest rate volatility from September 2023 to October 2025 and a $150,000 interest rate cap agreement to mitigate interest rate volatility from August 2023 to July 2024. The $150,000 interest rate cap agreement will increase to $175,000 to mitigate interest rate volatility from August 2024 to July 2026. The cap rate in effect at September 30, 2023 for all agreements in effect was 1.00%.

The Company has also entered into a forward starting interest rate cap agreement to mitigate interest volatility from November 2024 to October 2026.

In February 2023, the Company amended all existing interest rate cap agreements to replace LIBOR with SOFR as the benchmark interest rate, with all other terms of the agreements remaining the same. This amendment changed the previously annuitized premiums on the existing interest rate cap agreements.

The fair values of derivative instruments held as of September 30, 2023 and December 31, 2022, respectively are shown below:


	Balance sheet location	September 30, 2023		December 31, 2022
Derivative assets
Derivatives designated as cash flow hedges:
Interest rate caps	Prepaid and other current assets	$	16,374	$	18,510
Interest rate caps	Other long-term assets	15,804		15,864
Total derivative assets		$	32,178	$	34,374

Derivative liabilities
Derivatives designated as cash flow hedges:

Interest rate caps	Other long-term liabilities	$	—	$	2,071
Total derivative liabilities		$	—	$	2,071

The following table shows the effect of the Company’s derivative instruments designated as cash flow hedges on AOCI for the three and nine months ended September 30, 2023 and 2022, respectively:


		Three months ended September 30,
		2023				2022
	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	$	7,294	$	6,048	$	12,159	$	(29)


		Nine months ended September 30,
		2023				2022
	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	$	15,935	$	17,933	$	36,200	$	(627)

The following table shows 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, 2023 and 2022, respectively:


	Location and amount of gain (loss) recognized in income on cash flow hedging relationships
	Three months ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022
Total amounts of income and expense line items presented in the statement of income in which the effects of cash flow hedges are recorded in interest (expense) income	$	(11,811)	$	(9,542)	$	(30,812)	$	(26,880)
The effects of cash flow hedging:
Gain (loss) on cash flow hedging relationships:
Interest contracts:
Amount of loss reclassified from AOCI into income	6,048		(29)		17,933		(627)

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 $9,963 as of September 30, 2023.