Royal Caribbean Cruise Lines 2001 Annual Report Download - page 38

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)
36 Royal Caribbean Cruises Ltd.
80% of the contract price of three of the six ships currently on
order, Constellation, Serenade of the Seas and Jewel of the Seas
(or up to $1.0 billion in aggregate for the three ships). Capital
expenditures and scheduled debt payments will be funded
through a combination of cash flows provided by operations,
drawdowns under our available credit facility, the incurrence of
additional indebtedness and the sales of equity or debt securi-
ties in private or public securities markets. The terrorist attacks
of September 11, 2001 and the lowering of our credit ratings by
Standard & Poors and Moody’s have adversely impacted terms
and availability of financing in the financial markets, and it is inde-
terminable how long this situation will continue. Therefore,
there can be no assurances that cash flows from operations and
additional financings from external sources will be available in
accordance with our expectations.
Our debt agreements contain covenants that require us, among
other things, to maintain minimum liquidity, net worth, and fixed
charge coverage ratio and limit our debt to capital ratio. We are
in compliance with all covenants as of December 31, 2001.
Financial Instruments and Other
GENERAL
We are exposed to market risk attributable to changes in inter-
est rates, foreign currency exchange rates and commodity
prices. We minimize these risks through a combination of our
normal operating and financing activities and through the use
of derivative financial instruments pursuant to our hedging
practices and policies. The financial impacts of these hedging
instruments are primarily offset by corresponding changes
in the underlying exposures being hedged. We achieve this
by closely matching the amount, term and conditions of the
derivative instrument with the underlying risk being hedged.
We do not hold or issue derivative financial instruments for
trading or other speculative purposes. Derivative positions are
monitored using techniques including market valuations and
sensitivity analyses.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates
relates to our long-term debt obligations. Market risk associ-
ated with our long-term fixed rate debt is the potential
increase in fair value resulting from a decrease in interest rates.
Market risk associated with our variable rate debt is the poten-
tial increase in interest expense from an increase in interest
rates. We enter into interest rate swap agreements to modify
our exposure to interest rate movements and to manage our
interest expense. At December 31, 2001, our interest rate
swap agreements effectively changed $525.0 million of fixed rate
debt with a weighted-average fixed rate of 7.3% to LIBOR-
based floating rate debt. At December 31, 2001, 58% of our
debt was effectively fixed and 42% was floating. The estimated
fair value of our long-term debt at December 31, 2001, exclud-
ing our Liquid Yield Option™ Notes and Zero Coupon
Convertible Notes, was $4.3 billion using quoted market
prices, where available, or using discounted cash flow analyses
based on market rates available to us for similar debt with the
same remaining maturities. The fair value of our interest rate
swap agreements was estimated to be $35.7 million as of
December 31, 2001 based on quoted market prices for similar
or identical financial instruments to those we hold. A hypo-
thetical 10% decrease in assumed interest rates at December 31,
2001 would increase the fair value of our long-term fixed rate
debt by approximately $45.1 million, net of an increase in the
fair value of our interest rate swap agreements. A hypothetical
10% increase in assumed interest rates at December 31, 2001
would increase our 2002 interest expense by approximately
$3.4 million.
CONVERTIBLE NOTES
The fair values of our Liquid Yield Option™ Notes and Zero
Coupon Convertible Notes fluctuate with the price of our
common stock and at December 31, 2001 were $470.2 million
and $306.3 million, respectively. A hypothetical 10% decrease
or increase in our December 31, 2001 common stock price
would decrease or increase the value of our Liquid Yield
Option™ Notes and Zero Coupon Convertible Notes by
$17.2 million and $22.4 million, respectively.