Royal Caribbean Cruise Lines 2005 Annual Report Download - page 43

Note 10. Financial Instruments
The estimated fair values of our financial instruments are as follows
(in thousands):
2005 2004
Cash and cash equivalents $ 125,385 $ 628,578
Long-term debt
(including current portion
of long-term debt) (4,368,874) (6,580,079)
Foreign currency forward
contracts in a net (loss)
gain position (115,415) 104,904
Interest rate swap
agreements in a net
receivable position 8,456 20,267
Fuel swap agreements in
a net (payable) receivable
position (78) 8,130
The reported fair values are based on a variety of factors and
assumptions. Accordingly, the fair values may not represent actual
values of the financial instruments that could have been realized as
of December 31, 2005 or 2004 or that will be realized in the future
and do not include expenses that could be incurred in an actual sale
or settlement. Our financial instruments are not held for trading or
speculative purposes.
Our exposure under foreign currency contracts, interest rate and fuel
swap agreements is limited to the cost of replacing the contracts in
the event of non-performance by the counterparties to the contracts,
all of which are currently our lending banks. To minimize this risk, we
select counterparties with credit risks acceptable to us and we limit
our exposure to an individual counterparty. Furthermore, all foreign
currency forward contracts are denominated in primary currencies.
The carrying amounts of cash and cash equivalents approximate
their fair values due to the short maturity of these instruments.
The fair values of our senior notes, senior debentures, Liquid Yield
Option™ Notes and zero coupon convertible notes were estimated
by obtaining quoted market prices. The fair values of all other debt
were estimated using discounted cash flow analyses based on mar-
ket rates available to us for similar debt with the same remaining
maturities.
The fair values of our foreign currency forward contracts were esti-
mated using current market prices for similar instruments. Our expo-
sure to market risk for fluctuations in foreign currency exchange
rates relates to four ship construction contracts and forecasted
transactions. We use foreign currency forward contracts to mitigate
the impact of fluctuations in foreign currency exchange rates. As of
December 31, 2005, we had foreign currency forward contracts in a
notional amount of $2.6 billion maturing through 2008. The fair
value of our foreign currency forward contracts related to three ship
construction contracts, designated as fair value hedges, was a net
unrealized loss of approximately $103.4 million and a net unrealized
gain of approximately $34.7 million at December 31, 2005 and
2004, respectively. The fair value of our foreign currency forward
contracts related to the other ship construction contract, designated
as cash flow hedges, was an unrealized loss, of approximately $7.8
million and an unrealized gain of approximately $76.2 million at
December 31, 2005 and 2004, respectively. At December 31, 2005,
approximately 6% of the aggregate cost of the four ship contracts
was exposed to fluctuations in the euro exchange rate. (See Note 13.
Subsequent Events. )
The fair values of our interest rate swap agreements were estimated
based on quoted market prices for similar or identical financial
instruments to those we hold. Our exposure to market risk for
changes in interest rates relates to our long-term debt obligations
and our operating lease for Brilliance of the Seas . We enter into
interest rate swap agreements to modify our exposure to interest
rate movements and to manage our interest expense and rent
expense.
Market risk associated with our long-term fixed rate debt is the
potential increase in fair value resulting from a decrease in interest
rates. As of December 31, 2005, we had interest rate swap agree-
ments, designated as fair value hedges, which exchanged fixed
interest rates for floating interest rates in a notional amount of
$268.8 million, maturing in 2006 through 2013.
Market risk associated with our long-term floating rate debt is the
potential increase in interest expense from an increase in interest
rates. As of December 31, 2005, we had an interest rate swap agree-
ment, designated as a cash flow hedge, which, exchanges floating
rate term debt for a fixed interest rate of 4.395% in a notional
amount of $25.0 million, maturing in 2008.
Market risk associated with our operating lease for
Brilliance of the
Seas
is the potential increase in rent expense from an increase in
sterling LIBOR rates. As of January 2006, we have effectively
changed 69% of the operating lease obligation from a floating rate
to a fixed rate obligation with a weighted-average rate of 4.83%
through a combination of interest rate swap agreements, designated as
cash flow hedges, and rate fixings with the lessor, maturing in 2012.
Royal Caribbean Cruises Ltd. 41
Notes to the Consolidated
Financial Statements (continued)