Carnival Cruises 2012 Annual Report Download - page 113

Table of Contents
Substantially all of our debt agreements contain financial covenants as described in “Note 5 – Debt” in the accompanying consolidated financial
statements. At November 30, 2012, we believe we were in compliance with our debt covenants. In addition, based on, among other things, our forecasted
operating results, financial condition and cash flows, we expect to be in compliance with our debt covenants for the foreseeable future. Generally, if an event of
default under any debt agreement occurs, then pursuant to cross default acceleration clauses, substantially all of our outstanding debt and derivative contract
payables could become due, and all debt and derivative contracts could be terminated.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements, including guarantee contracts, retained or contingent interests, certain derivative instruments and
variable interest entities that either have, or are reasonably likely to have, a current or future material effect on our consolidated financial statements.
Quantitative and Qualitative Disclosures About Market Risk
For a discussion of our hedging strategies and market risks, see the discussion below and “Note 11 – Fair Value Measurements, Derivative Instruments and
Hedging Activities” in the accompanying consolidated financial statements.
Foreign Currency Exchange Rate Risks
Operational and Investment Currency Risks
We have $235 million of foreign currency forwards that are designated as hedges of our net investments in foreign operations, which have a euro-denominated
functional currency, thus partially offsetting this foreign currency exchange rate risk. Based on a 10% hypothetical change in the U.S. dollar to euro exchange
rate as of November 30, 2012, we estimate that these foreign currency forwards’ fair values would change by $24 million, which would be offset by a
corresponding change of $24 million in the U.S. dollar value of our net investments. In addition, based on a 10% hypothetical change in the U.S. dollar to
euro, sterling and Australian dollar exchange rates as of November 30, 2012, which are the functional currencies that we translate into our U.S. dollar
reporting currency, we estimate that our 2013 full year December 20, 2012 non-GAAP guidance would change by $0.20 per share.
Newbuild Currency Risks
In June 2012, we entered into foreign currency zero cost collars that are designated as cash flow hedges for a portion of Royal Princess’ euro-denominated
shipyard payments. These collars mature in May 2013 at a weighted-average ceiling rate of $1.30 to the euro, or $560 million, and a weighted-average floor
rate of $1.19 to the euro, or $512 million. If the spot rate is between these two rates on the date of maturity, then we would not owe or receive any payments
under these collars.
In July 2012, we entered into foreign currency zero cost collars that are designated as cash flow hedges for a portion of P&O Cruises (UK) newbuild’s euro-
denominated shipyard payments. These collars mature in February 2015 at a weighted-average ceiling rate of £0.83 to the euro, or $294 million, and a
weighted-average floor rate of £0.77 to the euro, or $272 million. If the spot rate is between these two rates on the date of maturity, then we would not owe or
receive any payments under these collars.
At November 30, 2012, the estimated fair value of our outstanding foreign currency zero cost collars was a net asset of $16 million. Based on a 10%
hypothetical increase or decrease in the November 30, 2012 U.S. dollar and sterling rates to euro exchange rates, we estimate the fair value of these collars
would increase $60 million or decrease $40 million, respectively.
At November 30, 2012, substantially all our remaining newbuild currency exchange rate risk relates to euro-denominated newbuild construction payments for
Regal Princess and a portion of P&O Cruises (UK)’s newbuild. These newbuild contracts have remaining commitments of $1.1 billion. The functional
currency cost of each of these ships will increase or decrease based on changes in the exchange rates until the payments are made under the shipbuilding
contract, or we enter into a foreign currency hedge. Based on a 10% hypothetical change in the U.S. dollar and sterling to euro exchange rates as of
November 30, 2012, the unpaid cost of these ships would have a corresponding change of $111 million.
Interest Rate Risks
At November 30, 2012, we have interest rate swaps that effectively changed $269 million of EURIBOR-based floating rate euro debt to fixed rate euro
debt. Based on a 10% hypothetical change in the November 30, 2012 market interest rates, the fair value of all our debt and related interest rate swaps would
change by $84 million. In addition, based on a 10% hypothetical change in the November 30, 2012 market interest rates, our annual interest expense on
floating rate debt, including the effect of our interest rate swaps, would change by an insignificant amount. Substantially all of our fixed rate debt can only be
called or prepaid by incurring significant costs, therefore it is unlikely we will be able to take any significant steps in the short-term to mitigate our fixed rate
debt exposure in the event of a significant decrease in market interest rates.
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