Carnival Cruises 2007 Annual Report Download - page 45

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (continued)
42 | CARNIVAL CORPORATION & PLC
including the effect of foreign currency swaps, in our subsid-
iaries’ functional currencies (generally the Euro or Sterling).
Specifically, we have debt of $1.89 billion in Euros and $457
million in Sterling and have $378 million of foreign currency
swaps, whereby we have converted $378 million of U.S. dollar
debt into Euro debt, thus partially offsetting these foreign
currency exchange rate risks. At November 30, 2007, the fair
value of these foreign currency swaps was an unrealized loss
of $30 million, which is recorded in AOCI and offsets a portion
of the gains recorded in AOCI upon translating these foreign
subsidiaries net assets into U.S. dollars. Based upon a 10%
hypothetical increase or decrease in the November 30, 2007
foreign currency exchange rates, assuming no changes in
comparative interest rates, we estimate that these derivative
contracts’ fair values would increase or decrease by $38 mil-
lion, which would be offset by a decrease or increase of $38
million in the U.S. dollar value of our net investments.
Finally, during 2007, we entered into cash flow foreign
currency swaps that effectively converted $438 million of U.S.
dollar fixed interest rate debt into £210 million fixed interest
rate debt that is the functional currency of our operation that
has the obligation to repay this debt. At November 30, 2007,
the fair value of these foreign currency swaps was an unreal-
ized gain of $3 million.
INTEREST RATE RISKS
We seek to minimize the impact of fluctuations in interest
rates through our investment and debt portfolio management
strategies, which includes purchasing high quality short-term
investments with variable interest rates, and issuing substan-
tial amounts of fixed rate debt instruments. We continuously
evaluate our debt portfolio, and make periodic adjustments to
the mix of floating rate and fixed rate debt based on our view
of interest rate movements, through the use of interest rate
swaps. At November 30, 2007 and 2006, 69% and 68% of
the interest cost on our debt was fixed and 31% and 32%
was variable, including the effect of our interest rate swaps,
respectively.
Specifically, we have interest rate swaps at November 30,
2007, which effectively changed $204 million of fixed rate
debt to LIBOR-based floating rate debt. In addition, we have
interest rate swaps at November 30, 2007 which effectively
changed $16 million of EURIBOR-based floating rate debt to
fixed rate debt. The fair value of our debt and interest rate
swaps at November 30, 2007 was $9.01 billion. Based upon
a hypothetical 10% decrease or increase in the November 30,
2007 market interest rates, assuming no change in currency
exchange rates, the fair value of our debt and interest rate
swaps would increase or decrease by approximately $143 mil-
lion. In addition, based upon a hypothetical 10% decrease or
increase in the November 30, 2007 interest rates, our annual
interest expense on variable rate debt, including the effect
of our interest rate swaps, would decrease or increase by
approximately $13 million.
In addition, based upon a hypothetical 10% increase or
decrease in Carnival Corporation’s November 30, 2007 com-
mon stock price, the fair value of our convertible notes would
increase or decrease by approximately $102 million.
These hypothetical amounts are determined by considering
the impact of the hypothetical interest rates and common
stock price on our existing debt and interest rate swaps. This
analysis does not consider the effects of the changes in the
level of overall economic activity that could exist in such
environments or any relationships which may exist between
interest rate and stock price movements. Furthermore, since
substantially all of our fixed rate debt cannot currently be called
or prepaid it is unlikely we would be able to take any signifi-
cant steps in the short-term to mitigate our exposure in the
event of a significant decrease in market interest rates.
BUNKER FUEL PRICE RISKS
We do not use financial instruments to hedge our exposure
to the bunker fuel price market risk. We estimate that our fiscal
2008 fuel cost would increase or decrease by approximately
$3.3 million for each $1 per metric ton increase or decrease in
our average bunker fuel price.