TERRAFORM GLOBAL, INC. - 10-K filing on 2016-12-21

Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2015

FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of assets and liabilities are determined using either unadjusted quoted prices in active markets (Level 1) or pricing inputs that are observable (Level 2) whenever that information is available and using unobservable inputs (Level 3) to estimate fair value only when relevant observable inputs are not available.

The Company uses valuation techniques that maximize the use of observable inputs. Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. Where observable inputs are available for substantially the full term of the asset or liability, the instrument is categorized in Level 2. If the inputs into the valuation are not corroborated by market data, in such instances, the valuation for these contracts is established using techniques including extrapolation from or interpolation between actively traded contracts as well as the calculation of implied volatilities. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized as Level 3. The Company regularly evaluates and validates the inputs used to determine fair value by using pricing services to support the underlying market price of interest rates and foreign currency exchange rates.

Recurring Fair Value Measurements

The following table summarizes the financial instruments measured at fair value on a recurring basis classified in the fair value hierarchy (Level 1, 2 or 3) based on the inputs used for valuation in the accompanying consolidated balance sheets:



	As of December 31, 2015								As of December 31, 2014
Assets (liabilities) in thousands	Level 1		Level 2		Level 3		Total		Level 1		Level 2			Level 3		Total
Interest rate swaps	$	—	$	11,404	$	—	$	11,404	$	—	$	(4,780	)	$	—	$	(4,780	)
Foreign currency forward swaps	21,383		—		—		21,383		—		—			—		—
Cross currency swaps	—		64,083		—		64,083		—		18,183			—		18,183
Total	$	21,383	$	75,487	$	—	$	96,870	$	—	$	13,403		$	—	$	13,403

The Company uses a discounted valuation technique to fair value its derivative assets and liabilities. The primary inputs into the valuation of interest rate swaps, cross currency swaps and foreign currency contracts are forward interest rates, foreign currency exchange rates, and to a lesser degree, credit spreads. The Company’s interest rate swaps and cross currency swaps are considered Level 2, since all significant inputs are corroborated by market observable data. There were no transfers into or out of Level 1, Level 2 and Level 3 during the years ended December 31, 2015 or 2014.

Fair Value of Long-Term Debt

The following table presents the carrying amount and estimated fair value of our outstanding short-term and long-term debt obligations as of December 31, 2015:



	As of December 31, 2015				As of December 31, 2014
(In thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Liabilities:
Long-term debt, including current portion	$	1,295,761	$	1,125,124	$	524,111	$	524,111

The fair value of the Company's long-term debt, except the Senior Notes and Revolver, was determined using inputs classified as Level 2 and a discounted cash flow approach using market rates for similar debt instruments. The fair values of the Senior Notes and revolving credit facility are based on market price information of the notes which is classified as a Level 1 input. The Senior Notes are measured using available trades at the end of each respective fiscal year. Although the revolver is not publicly traded, the company determined it appropriate that the discount rate for the revolver be benchmarked to the discount rate of the Senior Notes under the assumption that the potential market participants of the revolver are similar to the principal market participants of the Senior Notes. As such, the fair value of the Senior Notes and the Revolver 80.25% of their face value as of December 31, 2015.

The Company determined that book value approximates fair value as of December 31, 2014 due to the variable rate nature of these obligations outstanding as of that date.